Generally speaking, investors’ optimistic expectations around lower corporation taxes, fewer regulatory hurdles, greater fiscal spending and stronger US growth under President Trump’s administration have not abated.
US stocks, financials and High Yield, which experienced a dramatic resurgence in the months after Trump’s victory, continued attracting investors, in spite of the President’s turbulent first two weeks in office, BAML’s findings revealed.
Equities generated $12.7bn in flows, the highest level of inflows in seven weeks. Financials, materials and energy stocks still saw inflows, but these were slightly more muted at $1.4bn, $0.6bn and $0.4bn, respectively.
Bonds registered their largest inflows in seven months, trapping $11.5bn over the month. And it wasn’t just HY that recorded flows like this. Investment grade and bank loans also registered six and twelve consecutive weeks of positive flows, with IG bonds recording its largest flows in 6-months ($5.3bn).
Even the EM category, which remains a “conspicuous exception” to the Trump-inspired rally, has seen positive flows recently. EM equity funds brought in their largest flows in 16 weeks ($1.4bn), while EM debt received $1.7bn in new capital.
And although the US dollar weakened against the pound in the latter half of January and Russell 2000 and bank stocks began to falter, BAML’s Bull & Bear indicator rose to a 2.5-year high.
But there is still a chance that the “placid happy days” of the Trump rally could give way to a period that the investment bank terms a “populist hippie daze,” in which stocks become increasingly volatile.
Much like the economic situation of the late 1960s, BAML forecasts that present-day populist policies could similarly lead to “higher inflation and an angry rise in interest rates.”
The real “tell” for this market reversal is the combination of rising gold prices and rising yields, the investment bank said.
“Both the 1973-74 stock market crash and 1987 Black Monday were preceded by three quarters of rising bond yields and rising gold,” BAML argued. “And currently, the stock of negatively yielding global bonds is down to $9.5 trillion today as of 1 February from its peak of $13.3 trillion on 28 September last year.”
That is why investors should “watch for the combo of rising yields and rising gold prices to signal impending market volatility.”
