Bubble, Bubble … Are We in Trouble?
Ch-ch-ch-ch-changes. Turn and face the strange, if you want to be a richer man.
Today, we’re talking about changes. Specifically, changes in the ever-exciting world of market fund flows!
Fund flows? Wake me when it’s over … zzzz.
Don’t nod off: You’ll want to hear (read?) this one … especially if you listen to the talking heads on Wall Street telling you that we’re not in a bubble.
Great One Naftoli N. wrote in at 12:34 a.m. my time (apparently, neither of us sleep) to ask the following question:
The article, titled “The top reason US stocks aren’t in bubble territory, according to Fundstrat’s Tom Lee,” comes from Business Insider. I wonder what it’s about? Feel free to click over and read … I’ll wait.
For those still here, the gist of Lee’s reasoning is this:
In a note to clients detailing this data, Fundstrat’s Lee said: “I don’t see how this marks even the proximity of a top for equities.”
History of the World, Part I
Are you lost yet? Let’s back up a minute.
Fund flows are basically that — where investment funds flow, or where investors put their money. The majority of fund flows are driven by mutual fund and ETF activity — you know, the stuff you hold in your 401(k).
The current line of thinking is that when money flows into bonds, it’s bad for stock prices … and vice versa.
The contrarian viewpoint to this is that the more money flows into bonds … the more money can flow back into stocks.
This is the argument that Lee makes. How can we be in a stock market bubble when most of the money in the past three years went to bonds?
Surely those investors will realize the error of their ways and move that money into the stock market, thus moving the market higher. As we both know, stonks only go up, so why keep that money in boring old bonds?
In other words, billions of dollars sit on the sidelines just waiting to flow into stocks. Since all that cash isn’t active in the market, there can’t be a bubble. The market can still go higher. This is how many talking heads on Wall Street see our current market situation, and these fund flows have become a critical investment signal.
I say “become” because this particular signal is only about 25 years old. Before 1995, no one really eyed fund flows … or at least cared whether there was a correlation between money moving between stocks and bonds.
“Never before have we had a period where mutual funds have so consistently dominated the demand side of the market,” quipped a Wall Street researcher in the New York Times after equity-fund sales hit a monthly record in July 1995.
“Things are different now,” many Wall Street watchers said. You tell me what happened next.
History of the World, Part II
This trend continued well into the 2000s and remained so reliable, investment firms like Fundstrat use it as a cornerstone to predict market activity — which they, in turn, use to convince you and Naftoli into believing their interpretation about market timing.
However, things began to ch-ch-ch-change in the fund flows game back around 2017.
Despite stocks soaring to record highs, funds have flowed instead into bonds for the past three years — as Tom Lee’s data indicates.
The multibillion dollar question is: Why?
If Lee is correct, investors ignored the record market rally of the past three years in favor of lower returns in bonds. By Lee’s logic, investors are clearly just biding their time for the right moment to pile into stocks.
But if that was true, why didn’t fund flows shift completely back toward stocks in December 2018 when the market corrected? Or in March 2020, when the market took a nosedive?
Both of those months marked notable blips where fund flows favored stocks over bonds, it’s true. But those trends died quickly. It’s almost as if investors took advantage of market corrections and then immediately took profits…
So, just what in the wild, wild world of sports is a-goin’ on? Back in September 2020, Morningstar researcher John Rekenthaler concluded:
So, Naftoli, my answer to you is that Fundstrat’s “no bubble” prediction is operating on an old model — born in 1995 — that appears to be changing. The fund-flows indicator isn’t as reliable as it used to be. By itself, it doesn’t mean we’re in a stock market bubble … but it also doesn’t preclude a bubble, either.
Why You Should Forget Fund Flows
As for why the fund-flows indicator doesn’t work lately, I have a two-part theory:
- Baby Boomers are retiring en masse. The generation responsible for the biggest source of retail market fund flows is in retirement mode. Where do (should?) investors put their money when they retire? In safe-haven, solid growth investments like bonds, cash and cash equivalents. And that appears to be the case for Boomer retirees right now.
- Millennial investors — the generation set to replace Boomers as the biggest source of retail market fund flows — are scared $#!&less. These investors just dug themselves out of two recessions and finally found good jobs around about 2016 or 2017. It should come as no surprise, then, that when they finally get the opportunity to invest, Millennials are playing it safe. Back in 2018, Douglas Boneparth, president and founder of Bone Fide Wealth noted: “Even millennial clients we work with have 20% in fixed income.”
If my theory is correct, it means that the old fund-flows indicator is dead. It also reinforces the idea that speculation, not investment, drives the market to new all-time highs — because investment capital is heading disproportionately to the safer and steadier investments.
Thanks again for your question, Naftoli … the answer was quite a ride.
As for you out there — yes, you! — how do you feel about your retirement? Not to put you on the spot or anything… But are you feeling “good-ish?” Maybe you could be a tad more prepped?
How close would you be to reaching all your retirement goals if you could consistently rack up gains 10 times … 13 times … even 42 times better than the S&P 500?
If you ask Synchrony Bank, the average American has roughly $100,000 in retirement savings. And my colleague Ian King has uncovered a simple strategy with the potential to turn that average retirement account into as much as $1.2 million — in just five years.
Click here for what Ian King calls the “20-Minute Retirement Solution!”
The Good: It’s a Mu Point
Micron Technology (Nasdaq: MU) just got itself a shiny new double upgrade on behalf of Citigroup analysts today. Christopher Dan upgraded the memory maker from sell to buy, with a price target boost from $65 to $100 to follow.
Feeling all fresh and fancy-free, MU continued to fawn in the analyst limelight today. Both Deutsche Bank and RBC Capital Markets lifted their price targets on the stock by 13% and 46%, respectively.
The upside is clear to all, apparently: The pandemic purged the DRAM chip supply chain of its pre-pandemic glut, and analysts believe chipmakers like Micron now stand at the beginning of a “long-awaited upturn.” MU is up about 5% today, and we’ll get a deeper look at the company’s place in the memory market when it reports earnings in just a few days.
The Bad: Sachs Sacks Solar
On the other side of the analyst appreciation fence, Goldman Sachs just did First Solar (Nasdaq: FSLR) dirty. Sachs pegged the solar-power systems company from buy all the way down to sell — what’s known on the drama-loving Street as a double downgrade. That’s like a “breaking up by text” kind of blow-off.
So, what gives? Goldman believes that First Solar already had its day in the sun … that its earnings and margins have peaked, and the stock now faces “cyclical headwinds.” But this isn’t the first time that ol’ Solar’s been smacked across the face by an analyst reversal.
Nay, it was eight Tuesdays ago on November 10 that Raymond James also swung from bullish to bearish on FSLR — and for roughly the same reasons too. The Biden Presidency might go after repealing tariffs that have since kept certain competing solar system makers at bay.
And, despite the overall solar industry likely benefitting from a Biden push into renewables, First Solar’s thinning margins would have it stumbling to the back of the pack. FSLR was down about 5% today on the news, but make no mistake: The renewable energy market is here to stay, with or without First Solar.
And besides, we’ve harped about better buys out there in the energy space ever since Luke left for Tosche Station to pick up those power converters…
Click here for your one can’t-miss new energy play!
Ugly: Generic Name+
I may get flak from you HGTV heads out there … but why oh why did Discovery (Nasdaq: DISCA) pick now to launch Discovery+?
You don’t get the “bored while Nana’s in town” holiday crowd. Nearly everyone’s back to the virtual school grind by now. It’s either way too early in the year … or just a tad too late, don’t you think?
And yet, the umpteenth streaming service made its stateside debut this week. Discovery+ brings together all the semi-reality show content you love, kinda like and probably fall asleep through from the Food Network, Animal Planet, HGTV, TLC, A&E, DIY, OWN and a host of other snappy acronyms.
All told, the service brings heat to the content-streaming table with more than 55,000 episodes of more than 2,500 shows, including some Discovery+ originals as well.
Me? I didn’t need to sit through Vanilla Ice’s renovation show the first time around. Maybe I’m missing the point with Discovery+. I’ve been told “well, maybe you’re not the Planet Earth target market.” Or, separately: “Maybe falling asleep to Guy Fieri’s dulcet tones just isn’t your bag.”
I concede, and I digress. Nonetheless, Discovery just jumped headfirst into a choppy, choppy streaming sea, which is the only reason why I marked it as “ugly” today. DISCA has stayed in a steady upswing since news of the service broke over a month ago.
Great Stuff: I’m Not Saying It Was Aliens…
Another year, another shot at Greatness! Or, as we call it around here, Reader Feedback.
It’s the same game as always: You write us a quick memo with whatever’s on your mind, and we collect the cream of the crop to ramble on every Thursday. And I mean whatever — stock market related or otherwise.
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Joseph Hargett
Editor, Great Stuff