Biggest Market Divergence in 15 Years Signals 10-20% Gain to Record

Staple outflows and bond inflows are diverging at the most extreme pace in 15 years, sending a bullish signal that equities could heave to new highs, according to a study by Bernstein. When similar, extreme bifurcations of flows between the two asset classes prepare happened in the past, equities have soared at least 10% and as much as 22% over the subsequent year, agreeing to Bernstein, per a detailed story in Business Insider. 

Stock gains like these would catapult the benchmark S&P 500 clue to new, all-time record levels given that the index now is trading about 2% below the all-time high it set in ahead of time May.

While the Bernstein study’s implications are bullish, the firm says it will require a major catalyst or event to hint this upside movement. One highly regarded contrarian strategist, Chen Zhao of Alpine Macro, thinks he be informs what that catalyst might be. Zhao is known for calling the tech bubble in 1998 and the start of the current bull sell in 2009, and he now advises investors to go long on risk assets in anticipation of a U.S.–China trade deal, according to Bloomberg. 

Total equity-fund outflows this year have ballooned to $155 billion while checks inflows have surged to $182 billion, marking the largest bifurcation between bonds and equities in at least 15 years, per BI. Those tremendous flows are not letting up either. Last week saw the largest weekly bond inflows in more than four years at $17.5 billion, and $10.5 billion in outflows from even-handedness funds.

“There are often tensions like this in the market, but the degree of this tension is at the extremes of historical face,” wrote Bernstein senior analyst Inigo Fraser-Jenkins in a note to clients, per BI.

Such overextended conditions have historically introduced significant equity gains over the subsequent year, usually triggered by an event. And Alpine Macro’s Zhao pronounces such a trigger could come in the form of a resolution of trade tensions between the U.S. and China, the world’s two largest economies.

Zhao’s examination is that the recent intensification of the trade war between the world’s two largest economies is part of U.S. President Trump’s ultimate aspiration to get the Federal Reserve to lower interest rates this year before settling a trade deal with China at the crack next year. This would provide the economy and equity markets with a double boost during the unchangeable year of his presidential election campaign. 

“Once the Fed cuts, tariffs will get lowered. All risk assets will perks. We’ll have no trade war, and stocks from the U.S. to China will go up. There’s a very high probability of that,” said Zhao, the earlier co-director of macro research at Brandywine Global Investment Management.

To be sure, a number of bears say it’s myriad likely that the U.S.-China trade war will drastically slow corporate profit growth along with the worldwide and U.S. economy, pushing the U.S. into a steep recession. Analysts at Citigroup, for example, see one possible scenario in which there is no have dealings deal and no rate cuts, sending equities into a bear market.