- Despite overwhelming pessimism, US stock markets look strong. They have closed with gains for two consecutive months.
- JPMorgan Chase thinks that markets will continue to rise. Most asset managers think that equity markets have run ahead of their fundamentals. As a result, there’s a disconnect between US equity markets and the economy.
US stock markets
Most fund managers and brokerages don’t think that the US stock market rally is sustainable. However, JPMorgan Chase analysts expect the stock markets to rise more. The firm pointed to low equity allocations in investors’ portfolios. According to JPMorgan Chase, investors excluding banks only have a 40% allocation to equities. The firm expects the allocation to rise to 49% over time. Incidentally, many investors have been sitting on cash.
Fund managers sitting on cash
Last month’s Bank of America fund manager survey showed that while fund managers increased their equity allocation, their cash holdings are still high by historical standards. Berkshire Hathaway’s (NYSE:BRK.B) chairman, Warren Buffett, has also increased his cash holdings. At the end of the first quarter, Berkshire Hathaway was sitting on $137 billion in cash. A UBS survey of HNI clients showed that they’re also holding more cash due to the expectation that markets will fall.
Can high cash holdings lift US stock markets?
Higher cash holdings and lower equity allocations reveal investors’ pessimism towards equities. However, many see this as a contrarian “buy” call. Also, while most analysts have been vouching for a market crash, US stock markets have continued to rise. The S&P 500 (NYSEARCA:SPY) has only fallen 4.6% year-to-date. SPY has recouped most of its losses. If investors move some of their cash into equities, it would support the markets.
JPMorgan Chase on short-covering
JPMorgan Chase analysts also pointed to higher short positions. While higher short positions reflect the general pessimism in stock markets, it can be a contrarian “buy” signal. If stocks continue to rise, those who have shorted stocks have to cover their positions, which can lead to another increase in stock prices. Tesla (NASDAQ:TSLA) is a perfect example here. Short-covering added fuel to Tesla’s rally earlier this year.
Can US stock markets continue to rise?
From a fundamental perspective, it’s difficult to build a case for another increase in US stock markets. Market valuations are expensive for those who believe in value investing. However, with central banks and governments in a relentless easing spree, stocks have continued to surge. Meanwhile, the consensus view seems to be tilted towards a crash in US stock markets. A large number of analysts expect US stock markets to fall towards their March lows. So far, the analysts predicting a crash haven’t had any luck.