- Several Wall Street strategists have identified a so-called "flowless" rally in the stock market this year.
- Even though stocks are on a tear this year, outflows from equity funds have accelerated.
- Societe Generale's Alain Bokobza says this is evidence that investors are worried about the future - and he offered a way forward to navigate the uncertainty.
Stocks are on a tear this year - but not everyone is impressed.
Several investors have kept their enthusiasm tempered even as the market rebounded from a correction. While global stocks have gained 11% this year, $46 billion has been pulled from equity funds, according to Bank of America Merrill Lynch.
This dynamic has created what some strategists have called a "flowless" rally in which stocks had the strongest start to a year in 30 years, yet investors were pulling money out of equity funds. In other words, their aversion to stocks was not in sync with other forces that drove the market higher.
According to Alain Bokobza - Societe Generale's head of global asset allocation and equity strategy - investors must posture for the ongoing "tug-of-war" between the bullish and bearish forces pulling on the stock market.
As for what's keeping the market afloat despite fund outflows, stock buybacks remain one of the trusted drivers of this bull market's gains. Corporate tax reform drove share repurchases to a record last year, and 2019 is already on pace to surpass that milestone, according to BAML.
Many investors, however, don't share the same enthusiasm about the future of stock prices.
"Risk aversion is now very apparent and portfolios are already hedging for many risks," Bokobza said in a recent note to clients.
He continued: "Cash positions have also become very sizeable indeed, as the prospect of a US recession in 2020 does not bode well for risky assets."
A US recession next year is not far-fetched, according to other strategists at SocGen. In a separate note, Arthur van Slooten and his team pinpointed the yield curve and their proprietary indicator of economic news coverage as two indicators that suggest the next recession could arrive sooner rather than later.
This risk helps explain why some investors have stood on the sidelines of this rally, and even pulled money from equity funds. SocGen noted that more of them are turning to cash instead of risky assets; it seems they're heeding the widespread calls to hold more dry powder and take advantage of higher cash yields.
On the bullish side of the tug-of-war rope, Bokobza pointed out that monetary policy is still loose, fears of a full-blown trade war between the US and China may recede, and the United Kingdom may reach a Brexit deal.
Bokobza isn't calling on investors to dump risky assets altogether because he anticipates that some of the storm clouds that have gathered will soon clear. But he recommends a cautious "barbell" approach, with three strategies that should help investors maintain exposure to stocks without getting completely burned. They're outlined below, and directly quoted from him:
- "We don't match the current momentum and keep our weight on equities rather low at 40%, as we held firm to our position at the end of last year. Although we have raised our equity index targets compared to last quarter, we still see downside to summer 2020.
- "We reinforce our allocation to assets that help in the search for yield, now the number one priority driving investors' reallocations, clearly forced by the very dovish asymmetry of global central banks.
- "We have a strong focus on risk control, adding to assets with resilient characteristics and/or those that bring de-correlation (read: volatility reduction) to our allocation."