These Are NOT Signs of the Top

Stocks have been soaring for nearly two years. But if you think investors have gone "all in" on stocks, you'd be dead wrong.

Instead, folks are looking for safety. We know this because they're buying bonds much faster than stocks... And they're piling up cash at the highest levels in history.

This isn't what happens near a stock market top. And as I'll explain, it shows why this bull market has much further to run...

When investors pour everything into "risk on" investments, it usually means a top is close.

That's what we saw in 2021. Folks were getting rich in speculative stocks, cryptos, and non-fungible tokens. Hardly anyone expected the fun to stop.

It did, of course. It always does. That kind of excitement is a classic sign of a top.

Today, despite an incredible run-up since the 2022 market bottom, we're nowhere near that level of hype. We can see this in two ways...

First, investors aren't pouring money into stocks this year. According to data from the Investment Company Institute ("ICI"), they're buying safe bonds at much faster rates.

ICI is a trade association for the investment-fund industry. It tracks the weekly inflows and outflows for stock and bond mutual funds as well as exchange-traded funds ("ETFs").

This year, investors put a net $20.5 billion into U.S. stock mutual funds and ETFs. But that pales in comparison to the net $207 billion that went into bond mutual funds and ETFs.

Folks have poured more money into bond funds each month than they put into stock funds so far this year... And they've invested 10 times more in bonds overall.

Clearly, people like the idea of owning safe assets right now. And that makes sense. Bonds currently pay a hefty yield, unlike what we saw in the prior decade.

The unusually high yields on safer assets also explain our second signal... Cash is piling up on the sidelines.

The easiest way to see this is through money-market assets. Specifically, we're looking at retail money-market assets, which are effectively excess amounts of cash held in brokerage accounts.

This figure began rising in mid-2022 alongside interest rates. And it has nearly doubled since then. Take a look...

When folks talk about "cash on the sidelines," this is what they mean. These assets have grown by nearly $1 trillion in a little more than two years. And they're now approaching $2 trillion in total.

This is not bubble behavior. If investors were head over heels for stocks, they wouldn't be piling up cash... They'd be dumping their cash holdings to buy speculative assets.

Instead, folks are still nervous. And they're happy to earn a risk-free 5% yield in money-market funds as a result.

This is great news for the bull market that's underway. It means the rally is still in its early innings.

Eventually, these high levels of cash and bonds will fall. Investors will throw caution to the wind to chase higher returns... leading to the final stages of the boom.

We're not there yet. And that's why it's a smart idea to stay long stocks today.

Good investing,

Brett Eversole

Further Reading

Even though more folks are looking for safety in the market, investors are beginning to dabble in risk. The start of a "risk on" market is good news for stocks. And it's a healthy development for the current bull run... Read more here.

The market's "fear gauge" recently hit its lowest level in a while. Some folks might think this is a bad omen. But history shows similar periods of calm have led to outperformance over the next year... Learn more here.