I love college football, and as I watched the conference championship games this past weekend it occurred to me that kickers and investors have something in common. If you outkick your coverage in football, you kick the ball too far and leave your coverage teammates at a distinct disadvantage. In markets, you outkick your coverage when you get caught up in the frenzy of rapidly moving markets, ignore risks, and blindly chase markets higher, leaving your portfolio vulnerable to a blind-side hit. The only time outkicking your coverage is a good thing is if you happen to be Jonah Hill’s doppelgänger (fat Jonah, not skinny) with MC Hammer’s net worth, and you land Blake Lively.
Since the election, everyone and their mother is outkicking their coverage in U.S. equities because they’re caught up in Trump mania and what his plan could mean for growth and inflation. These investors had better keep their head on a swivel, because rising U.S. bond yields are getting ready to turn from Beauty into the Beast.
They got that exuberance
As I pointed out last week, Trump’s victory and the accompanying dramatic shift in investor expectations has led to a record amount of cash being put to work in the last few weeks. Institutional investors reduced their cash position from 5.8% to 5% in just two weeks! This is the largest two-week drop in cash since August 2009, and a cash drawdown of this magnitude has only occurred twice in the last 20 years.
During the last 10 years, investors have plowed over $1.5T into bond funds and $0 into equity funds. That’s right, equity funds have seen a zero net inflow over the past decade. Since the election, investors have been flipping that decade-long script by dumping bonds and loading up on stocks, causing a record-breaking disparity between stock and bond flows. U.S. equities have seen the largest inflows in more than two years, while bonds are experiencing the largest outflows ever! Not to mention that speculators in the futures markets are shoting Treasuries at a level not seen in close to six years.
But it’s not just investors of all sizes who are outkicking their coverage right now. It wouldn’t be true exuberance if big banks and Wall Street firms didn’t join the frenzy.