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Investors are talking the talk, but hedging the walk

Even after the pullback to end last week, U.S. stock prices are booming and fund managers have largely hitched their wagons to the idea that prices will continue rising for the foreseeable future. But many are hedging their bets, showing bullishness in words much more than in deeds.

What's happening: The vast majority of assets — including currencies, bond prices, commodities and equities — have risen notably in price since the start of the third quarter. It’s a "buy anything" market.


  • Still, data from the Investment Company Institute show equity funds have seen net outflows every week for at least the past 10 and for every month of the year, including $62.1 billion of outflows in July.
  • Bond funds, conversely, have seen net inflows each of the last 10 weeks and in every month since April, including $98.5 billion in July.
  • Money market funds remain near $4.5 trillion in holdings, close to record highs.

Between the lines: Investors are buying call options at historic rates, which give them the right but not the obligation to purchase stocks at a certain price. That means they benefit if prices continue to rise but can avoid losses if they fall.

  • Citigroup’s panic/euphoria model — tracking metrics such as options trading, short selling and client note bullishness, instead of stock buying — has reached almost three times the level denoting euphoria and shows the longest run of extreme bullishness since the early 2000s.

Reality check: The U.S. stock market continues to outperform the rest of the world by a wide margin despite the fact that the U.S. has done the worst of all developed economies in handling the virus, in terms of deaths, infections and the ongoing infection rate.

  • While improving, the economy remains depressed, with GDP expected to remain below 2019 levels until at least 2022.
  • Close to 30 million people remain on unemployment insurance.
  • Worse, a fundamental recession is developing within the downturn caused by COVID-19, economists say.

Be smart: U.S. stocks are defying fundamentals too. Earnings on the benchmark S&P 500 outperformed expectations by a record amount in the second quarter, but were still the worst since Q1 2009, down by 32% year over year, and are expected to fall 22% in the third quarter.

Don't sleep: The law requires asset managers to stand behind any public endorsements they have made and many firms can take months to make trades recommended by asset managers.

  • That means more money could flow into stocks soon, but also could mean many of the public stances asset managers have taken are months old — a relative eternity in the era of COVID-19, and based on now-outdated information.

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