From the desk of Willie Delwiche.
Key Takeaway: Lower prices have a way of souring investor moods. It’s a relationship that thrives on the feedback loop it creates. Increased selling pressure begets pessimism that fuels continued selling pressure. With the recent relief rally behind us, short-lived optimism has dissipated and bearish sentiment is on the rise (II bull-bear spread challenges its lowest level since the GFC and Consensus bulls fall to their lowest reading since the Covid crash). It’s hard to claim sentiment is washed out as long as pessimism is still expanding. And based on the disparity between investor moods and positioning, there’s still plenty of gas in the tank for the bears.
Sentiment Report Chart of the Week: Household Liquidity Near Historic Lows
The Fed’s latest report on the Financial Accounts of the US (otherwise known as the Z.1) shows that household liquid assets increased by slightly more than 2% in the first quarter. Compared to total financial assets (which were down nearly 2% in the quarter), household liquidity improved slightly. Household non-equity liquid assets rose from 17.9% of total financial assets in Q4 2021 to 18.6% in Q1 2022. That Q4 2021 level was the lowest on record and the only times in history that it has been lower than it was in Q1 were 2021 and 2000. In other words, even with the slight uptick, household liquidity remains near historic lows. Despite what the sentiment surveys say, households remain heavily exposed to equities and have not moved to the sidelines in a meaningful way. With the news now out that stocks are in a bear market and likely to face continued pressure from rising rates and deteriorating economic conditions, the risk is that households will seek to improve their liquidity position by reducing equity exposure. The last time liquidity was this poor (2000) it took nearly a decade of sideways market action until the liquidity rebuild was complete.
