The S&P 500′s around 27 percent surge this year may have left investors jumpy about whether a correction is on the cards, but a hoard of pent-up cash means the rally can continue, Deutsche Bank said.
The bank estimates around $169 billion in pent-up cash and short interest is likely to make its way into equities over the next three to four months.
“Each year for the last four years from December to April, investors have moved cash out of money markets into bond and equity funds,” it said. “We see equities as the beneficiary of cash re-deployment in 2014 as equity inflows have been running at a steady $23 billion monthly pace since February.”
It expects the S&P 500 will see a 10 percent gain early in the new year, assuming around $120 billion of pent-up demand goes into U.S. equities, in addition to normal inflows from savings and buybacks.
Concerns the Federal Reserve will soon begin to taper its asset purchases have also led to around $139 billion piling up in money markets, Deutsche Bank said.
“In a rare break of a 20-year trend, inflows to long-term funds (equity, bonds, hybrid) stalled on taper fears, like the financial crisis and U.S. downgrade,” it said.
In addition, short interest in U.S. stocks has been rising, with S&P 500 short interest at its highest since July 2012, or at 2.67 percent of market capitalization, suggesting investors are hedging tapering expectations, the bank said. It noted shorting has pulled about $30 billion from the market, negating nearly half of the $65 billion of inflows, since May.
“Short covering will see that money flow back into U.S. equities as catalysts pass such as the start of taper,” it said.
With all the pent-up demand, investors’ positioning in equities is actually fairly cautious and stocks aren’t fully pricing in recent strong economic data, the bank said.