The “retail wreck” is real. The shine of financials is fading fast. The technology darlings have taken it on the chin of late. Energy is uninvestable again. Inflation is heading in the wrong direction (well, in the Fed’s eyes, anyway). Yellen’s bunch insists on raising rates. Investors are complacent. Trump’s big plans for the economy appear to be off in the distance – at best. And valuations remain near levels seen prior to history’s greatest debacles.

In response to what would appear to be a table nicely set for the bear camp, what has the stock market done? Oh, that’s right, the S&P 500 is two days removed from its latest all-time high. So much for fear and loathing in the stock market!

So what gives? Why are stocks a stone’s throw from record levels when the backdrop can be viewed as questionable – especially by those who see Ms. Market’s glass as at least half empty?

Too Many Dollars Chasing Too Few Goods

The answer – well, in my opinion, of course – lies in the very simple economic concept of supply and demand. As SNL character Father Guido Sarducci so eloquently outlined in his Five-Minute University, economics – and in this case, the market – is all about one thing: supply and demand.

It’s the simplest of concepts, when there is more demand than supply, prices go up – and vice versa.

Thinking back to my Econ 101 course, another basic economic law would seem to apply here. If memory serves, the definition of inflation (i.e. higher prices) is, too many dollars chasing too few goods.

And while I can definitely be accused of oversimplifying the matter here, these two uber-simple ideas may help us understand what is happening in the stock market at the present time.

Follow The Money

Despite everything going on in the market today – from oil being back in a bear market to the talk of impeachment – stock indices are either at or near all-time highs. And the explanation might just be that investor dollars continue to flow into funds and ETFs at a record pace.

According to Bank of America Merrill Lynch data, in the week ending last Wednesday, investors poured $33.6 billion into stock and bond funds, which was the second largest weekly inflows ever. This total included $24.6 billion of inflows to equity funds, which was the most since the election.

BAML points out that during the five-day period where the S&P 500 tech sector dove nearly 3%, investors directed a net $100 million into technology funds. Oh, and by the way, this represented the 15th straight week of inflows into tech. As such, one can easily argue that there are still an awful lot of folks out there looking for “dips” to buy in the tech space.

Ben Eisen, of the WSJ, had this analysis: “It’s telling that the inflows came during a week in which economic data disappointed. An index of consumer prices on Wednesday showed inflation continued to wane in May. Retail sales also fell in May, the data showed. Plus, the Federal Reserve lifted rates and signaled that it plans to do so again this year, taking a more hawkish tone than some expected… But that isn’t deterring investors from deploying cash.”

Another interesting fact that the BAML report revealed is that as of the June numbers, fund managers have approximately 5% of their assets sitting on the sidelines in cash. Couple this with the recent inflows and the outcome is simple. As long as money continues to flow into funds, managers will have to keep putting it to work – regardless of Trump’s policies, the economic backdrop, or any other negative factor you can dream up. Remember, a great many funds MUST, according to their prospectuses, stay nearly fully invested at all times.

So, at this stage of the game, it might be a good idea to keep an eye on where the money is flowing.

Thought For The Day:

It’s not the size of the dog in the fight, it’s the size of the fight in the dog. –Mark Twain

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

    1. The State of the U.S. Economy

    2. The State of Earning Growth

    3. The State of Trump Administration Policies