(Bloomberg) -- The S&P 500’s recent leg higher has been missing an important ingredient: inflows from big-money managers. For those betting on a further rally, that’s a welcome development.
As the benchmark gauge inched higher so far in January, institutional investors reduced their bullish wagers amid uncertainty about President Donald Trump’s policies and the Federal Reserve’s interest-rate path. A measure of aggregate positioning among rules-based and discretionary investors fell to a two-month low, according to Deutsche Bank AG’s data. And commodity trading advisors cut their long stock exposure to the level last seen in the aftermath of a market rout in August, data compiled by Goldman Sachs Group Inc.’s trading desk show.
From a contrarian perspective, such skepticism bodes well for stock-market bulls because it means more dry powder to buy equities down the road, should the biggest fears fail to materialize. While political uncertainty weighs heavily on investor sentiment, inflation has been subsiding and fourth-quarter earnings season is off to a strong start.
“Positioning is not reflective of the current rally in risk assets and may cause some FOMU, or fear of materially underperforming, the benchmark,” Scott Rubner, managing director for global markets and tactical specialist at Goldman Sachs wrote in a note to clients Wednesday. “We have a favorable technical window for the next one month,” he added.
Money managers’ caution comes as the S&P 500 is hovering steps away from a record, while investors assess corporate earnings and the latest policy announcements from Trump for clues on the stock market’s next move.
The upcoming week will be crucial for Wall Street, with investors awaiting the latest interest-rate decision and a batch of earnings reports from technology giants including Microsoft Corp., Tesla Inc. and Meta Platforms Inc. The S&P 500 jumped above 6,100 for the first time ever on Wednesday, before paring its advance at the close.
If the benchmark index keeps moving higher or even stays flat, commodity-trading advisors may put between $15 billion and $30 billion into the stocks over the next month, Rubner wrote in the note to clients.
A respite in volatility is also seen as a tailwind for the stock market as another type of systematic strategy, Volatility control funds, typically adds exposure when realized volatility drops.
“With this reversal/re-positioning risk now in fact playing out, stocks are being mechanically bid by Vol Control and those who’ve under-captured the rally,” Charlie McElligott, managing director and cross-asset Macro Strategist at Nomura Securities International, wrote in a note to clients. That’s now contributing to some performance chasing in groups like small caps and technology shares, he added.
Hedge funds are starting to do just that, piling into US stocks at the fastest pace in 10 weeks last week following a cooler than expected CPI report, Goldman’s data show. Still, a proxy for hedge funds’ risk appetite relative to caution is hovering below last year’s highs.
“While most hedge funds feel the fundamentals are still good, they’re perhaps a little more careful than last year,” wrote Jon Caplis, chief executive officer of the hedge fund research firm PivotalPath.
Should investors change their tune, even the most conservative institutional investors — like mutual funds and pension funds — will likely on a buying spree amid the fear of missing out, said Matt Maley, chief market strategist at Miller Tabak + Co. Seasonality has been a supporting factor as well, with January being the year’s biggest month for inflows, on average, for mutual funds, according to Rubner.
“Even institutional investors with a cautious outlook will have to act bullishly if stocks keep rallying and they can quickly become short-term momentum players due to fear of falling behind,” said Maley said.
--With assistance from Jan-Patrick Barnert.
(Adds a comment from Nomura Securities in ninth paragraph.)
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