(Bloomberg) — The S&P 500’s recent rally missed an important ingredient: capital inflows from big managers. For those betting on another recovery, this is a welcome development.
While the benchmark gauge rose slightly in January, institutional investors reduced their bullish bets amid uncertainty over President Donald Trump’s policies and the Federal Reserve’s interest rate moves. A measure of overall positioning among regulated and discretionary investors fell to its lowest level in two months, according to data from Deutsche Bank AG. And commodity trading advisers reduced their long exposure to stocks to the level last seen following a market rout in August, according to data compiled by Goldman Sachs Group Inc.’s trading desk.
From a contrarian perspective, such skepticism bodes well for stock market bulls, as it means more dry powder to buy stocks in the future, if the biggest fears don’t come to fruition . With political uncertainty weighing heavily on investor confidence, inflation has eased and the fourth quarter earnings season is off to a strong start.
“Positioning does not reflect the current rally in risk assets and may cause some FOMU, or fear of materially underperforming the benchmark,” wrote Scott Rubner, managing director of global markets and tactical specialist at Goldman Sachs, in a note to clients Wednesday. “We have a favorable technical window for next month,” he added.
Fund managers’ caution comes as the S&P 500 nears a record high, while investors weigh corporate earnings and Trump’s latest policy announcements for clues about the stock market’s next move.
The coming week will be crucial for Wall Street, with investors awaiting the latest interest rate decision and a series of earnings reports from tech giants including Microsoft Corp., Tesla Inc. and Meta Platforms Inc. The S&P 500 jumped above 6,100 for the first time. never seen on Wednesday, before reducing his lead at the close.
If the benchmark index continues to rise or even remains stable, commodity trading advisors could invest between $15 billion and $30 billion in stocks over the next month, Rubner wrote in the note to clients.
A respite in volatility is also considered a tailwind for the stock market because another type of systematic strategy, volatility control funds, typically adds exposure when realized volatility declines.
“With this reversal/repositioning risk now playing out, stocks are being mechanically driven by Vol Control and those who have under-exploited the rally,” Charlie McElligott, managing director and multi-asset macro strategist at Nomura Securities International. , wrote in a note to customers. This is now contributing to some search for performance in groups such as small caps and technology stocks, he added.
That’s exactly what hedge funds are starting to do, piling into U.S. stocks at the fastest pace in 10 weeks last week, following a colder-than-expected CPI report, Goldman data shows . Still, hedge funds’ appetite for risk versus caution is below last year’s highs.
“Although most hedge funds believe the fundamentals are still good, they may be a little more cautious than last year,” wrote Jon Caplis, chairman and CEO of the hedge fund research firm PivotalPath.
If investors change their minds, even the most conservative institutional investors — like mutual funds and pension funds — will likely go on a buying spree, fearing they’re missing out, Matt said Maley, chief market strategist at Miller Tabak + Co. Seasonality has been an issue. This is also a supporting factor, with January on average being the biggest month of the year in terms of inflows for mutual funds, according to Rubner.
“Even institutional investors with a cautious outlook will need to act bullish if stocks continue to rally and they can quickly become short-term momentum players for fear of falling behind,” Maley said.
–With the help of Jan-Patrick Barnert.
(Adds comment from Nomura Securities in ninth paragraph.)
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