U.S. Markets Rally to Kick Off December


Investors sprinted into December ready to buy stocks, and buy they did. The S&P 500 closed at a fresh record high and the Nasdaq crossed into one early in the trading session. Market gains were led by regional banks — which are a key component of a cyclical bull market — and travel stocks. Oil and energy stocks, which had a blistering November, sold off some of those gains.

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There were rumblings of a bipartisan stimulus package from Congress today in the $908 billion neighborhood, but Senate Majority Leader Mitch McConnell extinguished those hopes. He did say that President Trump favored a direct stimulus package totaling some $500 billion that would go out to Americans by year-end. Who knows if that will happen, but at least they are talking. 

Investors have their full bull on these days after reluctantly wearing the horns all year. After pulling record amounts out of mutual funds and ETFs in October, they piled back in last month and put the money to work in recovery sectors and stocks. We’ll see how long their bullishness lasts. Bitcoin bulls have no fear right now.

Overly Bullish

New market records are proof of this, but sentiment tells a similar tale. The Bull/Bear ratio, which is a measure of both individual and institutional sentiment across multiple newsletters (not ours), is at its highest bullish level ever. You read that right.  

Like a lot of sentiment indicators, this one could also be viewed as a contrarian indicator. The more optimistic everyone is, the more likely the market will become too frothy. We’ve seen that happen again and again, but there are reasons to believe this time might just be different.

  • Very accommodative Federal Reserve which is buying corporate and government bonds and sitting on interest rates until 2023
  • Paltry yields in money market funds and high-yield savings
  • 20 million new investors who joined the herd in 2020
  • The surge in small cap and value stocks — the bedrocks of a broad-based recovery
  • Big investors have largely been out of the market for most of the year. There is $4.5 trillion in money markets earning less than 0.7%

Just look at how bearish investors were in October in the chart below from Bianco Research. Investors sold nearly $74 billion in equity mutual funds and ETFs in October, the most on record. Since March, mutual funds have suffered outflows totaling $379 billion.

Chart courtesy Bianco Research.

So Why is the Market at a Record High?

That’s a very good question and there are a few answers.

  • While investors pulled money out of ETFs and mutual funds at record levels this year, a lot of money went into the biggest stocks like Apple, Amazon, and Microsoft. Their enormous market caps have the weight to lift market-weighted indexes like the S&P 500 and the Nasdaq with them.
  • While mega-tech stocks have traded lower since early November, a lot of that money rotated into cyclical and recovery-based stocks, which is why the DJIA hit an all-time high last week.
  • While mutual funds saw the biggest outflows, investors have many more ways, besides ETFs, to access the stock market and individual stocks than they used to. 
  • Those 20 million new investors have been heavy buyers of individual stocks and fractional shares of stocks.

Does any of this mean that the stock market is guaranteed to go higher? Absolutely not. But if you are a market participant and you are in it for the returns, it’s hard to find them anywhere else — especially with the recovery looking strong in 2021.

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