Stock Habit Is Proving Hard to Kick as Money Pours Into Market

(Bloomberg) -- You can throw all the 2 percent days and all the Trump tweets you want at investors. They’re not quitting stocks. At least not yet.

During a placid week for equities, enthusiasm for the market picked up. Investors poured $5.6 billion of fresh cash into mutual funds at the start of April, the fourth-most in a decade, while exchange-traded funds stemmed the worst outflows since the financial crisis. Meanwhile, users of day-trading securities that pay two or three times the S&P 500 Index’s return remained convinced they can make money from all the jarring ups and downs.

Headlines surrounding President Donald Trump’s trade policy and Facebook Inc. Chief Executive Officer Mark Zuckerberg’s testimony to Congress were little more than noise. Why not, when corporate America is kicking off what may be the best earnings season in seven years?

Sentiment is far from euphoric levels seen in late January after a two-month tumult wiped off $3 trillion of equity values. But there was little to indicate any permanent damage to the buy-the-dip mentality that has ruled markets for the last five years.

“We’re not looking for earnings to decline or the kind of falls that would lead to concerns that we’re entering a recession or a bear market,” said John Carey, a fund manager for Amundi Pioneer Asset Management in Boston. “All the signs point to a strong economy,” he said. “The impulse to buy on dips is not quite so pronounced, but still alive.”

The S&P 500 rose 2 percent over past five days, with only one session experiencing moves of more than 1 percent. That’s in contrast with the previous two weeks, when the index swung that much in all but two days and rose or fell 2 percent or more three times. The Cboe Volatility Index dropped 19 percent over the week to the lowest level in a month.

Investors have warmed up to stocks, taking advantage of cheaper valuations as the earnings expansion remains on track and economic data has suggested worries over inflation was overblown. At 17 times forecast profit, the S&P 500 traded at the lowest multiple in two years.

ETFs focusing on U.S. equities attracted almost $9 billion of fresh money over the past week, reversing a quarter of the outflows seen over the last two months, data compiled by Bloomberg show.

“People are starting to settle down,” John Iborg, a portfolio manager at QS Investors, which manages $22 billion, said in an interview at Bloomberg’s New York headquarters. “They’re starting to get their senses about inflation expectations and how that might not necessarily be the biggest thing eating at equity risk right now.”

In the market’s most excitable corners, where traders use leveraged ETFs as a way to target short-term bets on up-and-down swings, conviction have been unshakable. Money has poured into securities that are long S&P 500 stocks and drained out of those that are short. Thanks to inflows, assets of leveraged long funds have kept growing this year in spite of falling stock prices. The market capitalization of bullish products has eclipsed that of inverse notes since November, with their ratio topping 2 in January for the first time ever.

Not only haven’t investors bailed, they’re headed back into stocks seen as more risky. Small-cap stocks have beaten their large-cap counterparts this month and companies that recently went public outperformed the S&P 500. Volatility has been sought with jumpy shares outpacing calm ones.

The risk-on behavior bodes well for equities, according to Jeff deGraaf, Renaissance Macro Research’s co-founder. “These factors firming in concert is more supportive of upside,” he said.

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net, Sarah Ponczek in New York at sponczek2@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Chris Nagi, Richard Richtmyer

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