Thursday, April 16, 2020

From Reach for Yield to Mad Dash for Cash to Rebalancing into Stocks

We live in an age of future shocks. It wasn’t too long ago that everyone seemed to be reaching for yield in the bond and stock markets. Actually, that was evident as recently as January 17 of this year, when the yield spread between high-yield corporate bonds and the 10-year US Treasury bond fell to 322bps, the lowest since October 8, 2018 (Fig. 1). That was followed by a mad dash for cash, as evidenced by the jump in this spread to 1,062bps on March 23, which was the highest reading since May 26, 2009. That also happened to be the day that the Fed announced QE4ever. Since March 24, it’s been a mad dash to rebalance away from cash and bonds into stocks.

That’s evidenced by the 27.2% jump in the S&P 500 since March 23 through Tuesday's close (Fig. 2). The index is still down 15.9% from its record high on February 19 but down just 2.1% versus a year ago. Joe and I have been among the few optimists lately: We declared on March 25 that the S&P 500 had bottomed on March 23 and forecast that it would reach 2900 by year-end. It has to rise only another 1.9% to get there, well ahead of schedule. That’s truly astonishing under the circumstances!

Admittedly, before the virus hit the fan and spread throughout the world, our year-end target had been 3500. We got close when the index peaked at a record 3386.15 on February 19, appearing at that point to be on track to hit that target well ahead of schedule.

So where do we go from here? We are sticking with 3500 by the end of next year. There will obviously be setbacks along the way, but we don’t expect to see the March 23 low again as long as progress continues in the war against the virus.

By the way, here are some updates on the unprecedented mad dash for cash that occurred during March:

(1) Bond and equity funds. During the four weeks through April 1, bond and equity funds, including mutual funds and exchange-traded funds (ETFs), had estimated net outflows of $301.6 billion, according to the Investment Company Institute (Fig. 3 and Fig. 4). Bond funds had outflows of $277.9 billion, while stock funds lost $23.7 billion.

(2) Liquid assets. During the four weeks through March 30, liquid assets jumped by $1.1 trillion, led by money market mutual funds held by institutions ($511.8 billion) and savings deposits ($492.9 billion) (Fig. 5).

(3) Bank balance sheets. Total deposits at US commercial banks jumped $811 billion during the four weeks through April 1 (Fig. 6). Their borrowing increased $330 billion over the same period. On the asset side of their balance sheets, commercial & industrial loans rose $486 billion, while their portfolios of US Treasury and agency securities rose $38 billion.

No comments: