There is a fascinating table in JPMorgan’s 2018 year-end outlook released overnight, previewed yesterday by head quant Marko Kolanovic: it shows that a funny thing happened as the so-called experts were looking for signs of retail euphoria (and repeatedly were unable to find it): everyone went “all-in” stocks, and not just retail investors and US households, but mutual funds, hedge funds, pensions, systematic, and sovereign wealth funds.
The table below breaks down equity positioning in percentile terms by investor type: it shows that never investors have never been more long equities, or more “all-in” stocks.
As JPMorgan calculated first one month ago when looking at the equity positioning of the main investor types, “allocations are near historical highs, not leaving much room for further increases.” How historic? The bank explains:
Starting with retail investors one can notice that margin debt (measured as percentage of market capitalization) is at its highest point ever, which includes the 2000 tech bubble episode. The percentage of US household wealth in equities is in its 94th percentile and above its 2007 peak, but slightly below 2000 levels. Sovereign wealth funds and US mutual funds are also near record levels. Pension Fund allocations appear to be in the 88% percentile, although there is some uncertainty around this number in adjusting for private asset and HF holdings. Global Hedge Funds’ allocation (as measured by equity beta) are also near record highs, and Equity Hedge funds’ allocation in their 93rd percentile (since 2005).
Why does this matter? Because with everyone already long stocks, there is no marginal buyer left, or as JPM puts it, “there is only so much the market can rally if equity investors are already near maximal allocations.” And with increasingly more traders and momentum-chasers shifting away from the manipulated arena of stock trading, and on to cryptocurrencies, one can understand why both commercial and central banks – in addition to Jamie Dimon of course, who is “richer than you are” only as long as you trade those instruments in which he makes markets – hate the best performing asset class of 2017.
And while it is not just retail investors that are all in…
… and so are Long/Short, Macro and Systematic hedge funds…
… the question asked – and answered – by JPMorgan is what event catalyzed this rush to “all in” stocks for everyone from hedge funds to mutual funds, to robots, algos and ultimately, retail investors. The answer, as shown on the chart below, was the election of Trump.
It was that event in November 2016 that ended the outflows from equity funds – and the great unrotation from stocks into bonds – and saw some $300 billion in new funds allocated toward passive, or ETF funds.
And since bond funds have paradoxically also enjoyed a substantial inflow of new capital, or some $171Bn YTD (in anticipation of frontrunning central banks during the next QE), the only losers from this “Trump Trade” are active, better known as “human”, professional investors: YTD active equity funds have lost a cumulative $136 billion. As for the irony, that of all the things that could crush the “smartest people in the room”, and leave them with paltry bonuses for 7 years in a row, the three biggest factors turned out to be record high stock prices and cheaper investing alternatives, a populist president who unleashed a historic rally into the biggest market bubble of all time, and of course, the Federal Reserve’s central planning, we doubt that said active investors who now find themselves quoting each other on twitter instead of actually managing money, find it as amusing as we do.