What's going on?
There are plenty of reasons for investors not to chase after US stocks, but according to a report from JPMorgan earlier this week, the rally might just be getting started.
What does this mean?
American stocks are up almost 40% from their March lows, and just 10% shy of their all-time highs. And that’s despite all the reasons they potentially shouldn’t be: a shrinking economy, sky-high stock valuations, rising US-China tensions, an over-reliance on big tech stocks to drive the rally, and, most recently, a surge in domestic riots. So what could possibly push US stocks even higher?
Well, according to JPMorgan, a couple things. First, major investment firms are sitting on near-record amounts of cash, so there’s plenty of money on standby that can be used to buy stocks and drive prices higher. Second, the amount of money allocated to stocks compared to bonds is considerably below average. In other words, JPMorgan reckons billions of dollars could flow out of bonds and into stocks when the time comes for investors to rebalance their portfolios.
Why should I care?
For markets: Reality check.
If stocks do keep climbing, JPMorgan thinks it’ll lead to a self-perpetuating rally as higher prices encourage more FOMO-buying. And since bond yields are near-zero, sprinkle in some “TINA” – there is no alternative – and you’ve got the recipe for some attractive-looking stock markets. Of course, with massive parts of the US in shutdown, only time will tell if those investors are going to be brought back down to Earth with a bump.
The bigger picture: Eat my shorts.
Regulatory data earlier this week showed the level of short positioning in US stocks – that is, the amount of money betting stock prices will fall – is at its highest level in five years. If US stocks continue to grind higher, investors might be forced to backtrack on those bets to avoid further losses – and the resulting “short squeeze” could give the rally yet another shot in the arm.