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The S&P500 has rallied 28% since the close on 3/23. Many are scratching their heads as this has occurred simultaneously with the largest jump in unemployed ever and the economy of the U.S basically shut down for about a month. Yes, the market was historically oversold the third week in March -as TPA made clear in a number of reports. Yes, the Federal government has orchestrated un unprecedented amount of stimulus, but what really matters, for the stock market, is whether or not money stays in stocks and the evidence of mass liquidations by investors has not emerged. As long as investors, who have their money at invest managers, do not sell stocks cannot stay down.

The asset management industry is overwhelmingly run by managers whose mandate is to remain invested in stocks. There is over $100 trillion managed worldwide. The top 2 managers in the world are Blackrock and Vanguard (see table below 1 from IPE). Blackrock manages most of the ETFs and Vanguard is the largest index fund. These companies, like most money managers must follow their mandate of being invested in stocks for their investors. Money has flowed to passive investing as the result of the poor performance of active managers versus their benchmarks (Bloomberg table 2 below). In addition., the vast amount of AUM at active managers is in long-only funds, who have promised to remain at least 95% invested. Table 3 below from a 2020 Price Waterhouse report, shows investment management AUM over time. Although the amount of dollars in alternative investments is growing, it is completely outweighed by assets in mutual funds (almost all long-only) and mandates (funds with strict mandates for investing).

The tendency for most of money management to remain invested can also be seen in the cash positions of money managers. Recently the cash positions of managers hit the same level seen during the great recession of 2008, but this was still only just above 5.5%.

We are headed into what will probably be one of the worst earnings periods ever. Even if companies do not put out horrible 1 quarter numbers, their outlooks will be bad. With less than 5% of all stocks reported, the initial EPS growth numbers look pretty dismal (see Bloomberg table below).

One need look no further than the price of Crude this morning to evaluate the state of the U.S and the Global economy. Crude is trading at 11.24 down more than 33% from Friday. This level for Crude is lower than during the 2008-2009 debacle and the lows of 2015-2016. The current levels were last seen during the Asian Currency Crisis of 1998. On an inflation adjusted basis, Crude is at 40-year lows. Crude should be a very good indicator of economic conditions.

As bad as the economy is, stocks can only go lower if people sell and the subsequent liquidations take place. Some of this may be delayed, but as the government allows sales out of retirement accounts. as small businessmen realize they must use investments to keep their operations going, and as everyone must using savings to replace income to pay for living, people may be forced to sell. This MAY occur, but has not materialized yet.

Money out of asset managers, not economic numbers or EPS, will be the signal that stocks are in for a sustained decline.

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