Despite a positive turn witnessed in January 2023 following last year’s terrible sell-off that wiped away billions of dollars in value, the stock and crypto markets appear to have failed to win over investors.
According to a report from Bank of America, cash held in money market funds has hit a record high of $4.8 trillion as interest rates stay at multi-year highs. Most money market funds earn around 4%.
As demonstrated by year-to-date fund flows, stock investors remain cautious, which has been high for fixed-income and emerging market equities but sluggish for US stocks. Inflows into investment grade and high-yield debt have been at their highest since September 2021, averaging $7.7 billion over the past month. Meanwhile, developing market debt and equities have had their highest monthly inflows since March 2021, totaling $7.1 billion.
Investors appear to be exiting US technology and healthcare companies as well. This is referred to as “capitulation” by Bank of America. The recent outflow trend from these two industries has been the worst since January 2019.
According to the weekly AAII Investor Sentiment Survey, investors are likewise negative on equities. Pessimistic respondents outnumbered optimistic respondents by 36.7% to 28.4%.
Still, Michael Hartnett of Bank of America finds a solid basis for this pessimism. While he agrees that the stock market’s “pain trade” is still higher, he advises investors to exit the S& P 500 once it hits the $4,100 to $4,200 area.
Surprisingly, the S& P 500 reached a high of $4,150 on Wednesday, Feb. 1, following a remark from Federal Reserve Chair Jerome Powell indicating that the economy’s disinflationary trend had begun.
Hartnett predicts a harsh landing in 2023 and that additional tightening of financial conditions this spring may be necessary to push the US economy, which is now rising at a rate of more than 7% in nominal terms, into a recession.
In the psychology of a market cycle, the disbelief stage refers to when investors are doubtful of the market’s upward trend and remain cautious, even while the market continues to exhibit positive increases. For example, this might occur during a time of high market volatility or a bear market in which investors may have experienced considerable losses.
During this period, investors may be apprehensive about returning to the market and choose to stay on the sidelines, keeping cash or investing in less risky assets. They may also postpone investing until additional proof of the market’s rising trend is obtained.
As many investors remain uncertain about the market’s direction and are afraid to invest, this stage is generally characterized by a lack of market participants and low trading volumes. This can also lead to a lack of market momentum since there may not be enough purchasing pressure to push prices upward.
However, investor confidence may gradually return as the market rises, and more players may enter the market. This can assist in boosting market momentum and driving prices higher as investors gain confidence in the market’s direction and become more eager to invest.
If any wealth in money market funds was to move into the cryptocurrency market, it might have a huge impact. Although Bitcoin has had solid year-to-date gains of more than 45%, the possible flood of cash might drive up demand, potentially leading to higher prices.
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