Well, wasn’t last week a bit of a cold shower for investors. European stock markets closed lower and US ones were flat last Friday, after nonfarm payrolls badly missed expectations in March.
In fact, it’s a surprise the markets declined so little. Investors had other things to worry about, too: President Trump’s surprise airstrike on Syria was a big one. The president, who until not long ago was making positive noises about his Syrian and Russian counterparts, changed his mind after a chemical weapons attack that killed many children.
Critics say Trump acted too quickly and out of impulse, with insufficient evidence as to who was responsible for the chemical attack. Even some of his voters were unhappy. This episode opens the way for a much more challenging geopolitical future, so it’s fair to expect volatility to increase.
The Bull & Bear indicator developed by analysts at Bank of America Merrill Lynch still has not reached the extremely bullish “sell” signal, but it isn’t far. It stood at 7.1 on Friday, according to the bank’s analysts.
As a rule, the indicator gives a “sell” signal when it goes past 8, and a “buy” signal when investor sentiment falls below 2.
Of its components, hedge fund positioning, credit market technicals and equity market breadth were very bullish, while equity flows were bullish. Long-only positioning and bond flows were bearish.
Looking at the weekly flows of capital, last week was a risk-off week: equities saw the largest outflows in 40 weeks, worth $7.4 billion. Bonds, predictably, saw inflows: $12.4 billion worth of them, an 8-week high.
It was the 15th straight week of inflows for investment grade bonds, which took in $6.7 billion. Even junk bonds saw money going in last week, the first time in five weeks; they got $3.1 billion.
Investors liked other types of debt, too: emerging market debt saw $2.2 billion in inflows, the 10th straight week of inflows. Bank loan funds have seen 21 straight weeks of inflows, with $600 million going in last week.
Looking at equities, it becomes clear which region investors are seeking to avoid right now: US stocks saw $14. 5 billion pouring out, the largest outflows in 82 weeks.
This may be just the beginning. After all, presidential cycle theory says that a president’s first year is the worst for markets. Investors may have to wait for Donald Trump’s year in power to hope for better returns.
However, according to another theory, even that may be doubtful; 2020 ends in a 0, which according to decennial theory is the worst-performing year for markets in a decade. The best-performing years usually end in 5; 2025 it is, then.