Investors Look Past the Chaos and Throw $53 Billion at Stocks

(Bloomberg) -- Traders might have surmised that rising coronavirus cases and turmoil atop the government would breed at least the beginnings of caution among investors. Not so much.

In what is shaping up as a historic month for equities, exchange-traded funds focused on U.S. stocks were just hit with one of the biggest deluges of cash ever recorded, attracting nearly $53 billion in November. A similar enthusiasm can be seen in flows to long-term mutual funds, following a stretch in which the buy-and-hold set pulled money for 26 of 29 weeks.

The cascade of money explains any number of market trends, not just the strength of gains -- November could easily be the fourth-best month for the S&P 500 in two decades -- but the much-discussed rotation into beaten-down areas. The small-cap Russell 2000 beat the tech-heavy Nasdaq 100 for a second week, even as hospitalizations climb and the future of Federal Reserve lending programs remains unclear.

As hazy as the economic outlook is, investors are viewing this as an opportunity to buy the dip in sectors that have been battered by the pandemic, according to JPMorgan Asset Management.

“That means that any sort of pullback in the market when you see bad news, it gets absorbed by this cash,” said Gabriela Santos, a global market strategist at the firm, in a Bloomberg Television interview. “It’s especially your hardest-hit sectors, your more cyclically, economically oriented sectors and regions that are going to see the biggest bump.”

That’s likely to continue given that mountains of cash are still parked in money market funds, Santos said. Nearly $1 trillion flooded into the funds from February to late May as the pandemic gripped markets, ballooning U.S. money-fund assets to a record $4.8 trillion. That pile has since shrunk to roughly $4.3 trillion -- still well above pre-virus levels.

Now, with a potential end to the pandemic in sight, analysts expect that the cash stashed in money-market funds will continue to fuel stocks. The S&P 500 has rallied 8.8% in November, on track for its strongest month since April. Meanwhile, the Russell 2000 has surged 16%, also its best showing since April.

“Investors were eager to get some money put back into the markets,” said Chris Gaffney, president of world markets at TIAA Bank. “Some of those sectors and areas that depend on growth, I think investors are starting to look at again and maybe moving back into.”

Of course, the tug-of-war between reopening optimism and a darkening coronavirus picture could quickly tilt in the bears’ favor. The share of U.S. hospitals anticipating a critical staff shortage within seven days rose to a record, and the number of Americans hospitalized has more than doubled since Labor Day. That was enough to send the S&P 500 lower on Friday, leaving it down 0.8% on the week.

“Another week of negative headlines, and people will get more defensive going into year-end, especially now that states are continuing to shut down,” said Michael O’Rourke, chief market strategist at JonesTrading. “If we don’t see hospitalizations start to decline, come the first week of December, investors who rushed in on the vaccine news may revisit their thinking.”

But those concerns have done little to dissuade speculators. Hedge funds that place both bullish and bearish wagers on equities are gearing up for more upside. Their net leverage, a measure of industry risk appetite that takes into account long versus short positions, reached a record high this month, according to data compiled by Credit Suisse Group AG. Among hedge fund clients at JPMorgan Chase & Co., net leverage has increased to levels not seen since at least the start of 2018.

Additionally, after months of sitting in money-market funds that yield next-to-nothing, investors may be looking to eliminate so-called cash drag from their portfolios heading into year-end.

“This is the time where people are introspective and are saying, ‘I might have had cash, but cash isn’t the solution long term,’” Richard Steinberg, chief market strategist for The Colony Group, said. “A lot of the moves we’ve had recently is to position going into next year, almost as a tabula rasa.”

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