(Bloomberg View) -- It's the final day of February, which means it's time to examine the month in markets. While it's no surprise that the big story was the unrelenting rally in stocks -- the Dow Jones Industrial Average topped 20,000 for the first time and the MSCI All-Country World Index gained 2.42 percent to a new high -- it may be shocking to know who was driving the gains.
JPMorgan Chase & Co. took a deep look at money flows and found that as big institutions pulled back, mom and pop stepped up in a big way. They poured a net $68 billion into equity funds for the year to date, a pace that is almost six times faster than in 2016. Cynics might say this is proof of a market top since retail investors are often associated with "dumb money," but there's a lot of it that can still be deployed after they largely avoided stocks following the financial crisis.
"This is a return to normal," Nikolaos Panigirtzoglou, a global market strategist at JPMorgan, told Bloomberg News. And the smart money? Demand for hedges is rising, with the VIX about 25 percent below its five-year average. Speculators have raised net positions in CBOE Volatility Index futures from a record low, pushing them up in three of the past four weeks, Commodity Futures Trading Commission data show.
BONDS
What was supposed to be the year of the bear market in bonds is anything but, as investors start to question the Donald Trump-inspired "reflation trade." The Bloomberg Barclays Global Aggregate Index, which tracks about $46 trillion of fixed-income assets worldwide, is putting together its first back-to-back monthly gain since mid-2016, rising 0.39 percent in February after jumping 1.13 percent in January. What sticks out this month is that the only part of the market to drop is bonds that provide a hedge against faster inflation.
COMMODITIES
Maybe one reason that investors are sanguine about the prospects for faster inflation is that prices of raw materials have done very little this year. The Bloomberg Commodities Index rose a paltry 0.16 percent in February after inching up 0.09 percent in January. Gains in metals and agriculture prices have been offset by lower energy prices, which are a big component in consumer prices indexes. With growth in U.S. nominal gross domestic product still slow, and growing financial strains in China and the euro zone, the reflation trade is ending, according to a team of economists at Cornerstone Macro LP led by Nancy Lazar.
FOREIGN EXCHANGE
Currency traders finally have something to be thankful for as volatility calms down and emerging-market currencies stage a rebound. Currency-focused funds tracked by a Parker Global Strategies LLC index were on pace for a 0.67 percent gain this month, the biggest since before the U.S. elections. The MSCI EM Currency Index is up 1.70 percent in February, after jumping 2.07 percent in January. The currencies of Mexico, Turkey, Israel, Russia and South Africa led the way, all appreciating at least 2.75 percent this month.
TEA LEAVES
Investors of all types around the world will be focused on Trump's speech to Congress at 9 p.m. Trump's promises of tax cuts, looser regulations and big infrastructure spending have driven markets since the elections in November, but very few details have been provided. Investors are getting anxious. Any signs that the White House is more focused on building a wall along the border with Mexico, tightening immigration, repealing Obamacare and reworking trade deals could hurt stocks and the dollar while giving bonds a boost.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is editor of Bloomberg Prophets.
To contact the author of this story: Robert Burgess at bburgess@bloomberg.net.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.
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