Investors have topped up their cash holdings at the fastest rate since March 2020 as debate intensifies over whether stock markets will continue rallying now the US economic recovery from the pandemic is firmly under way.

Data from fund flow tracker EPFR showed investors moved $57.3bn into cash in the week to Wednesday. Analysts at Bank of America said this was the largest amount since the market turmoil of last year, when the coronavirus crisis gripped markets and the S&P 500 blue-chip share index lost a fifth of its value during March.

Increases in overall cash holdings by investors tend to reflect rising caution, as well as expectations of lower returns from stock and bond markets.

“Cash is the natural stopgap when you are reassessing your investment framework,” said David Jones, a strategist at Bank of America. “We are also positioning for higher taxes.” US President Joe Biden has proposed changes that would almost double the levies on capital gains for people earning more than $1m.

The rise in cash holdings coincided with relatively low flows into equity funds during the week. Investors put $10.5bn into stock mutual funds and exchange traded funds, a fall from the previous week and a sharp reduction from the $58bn that flowed into equity holdings during a record week in early February.

The S&P 500 has gained 88 per cent since its March 2020 low and rallied beyond 4,200 points to a new closing high on Thursday after the US recorded an annualised pace of economic growth of 6.4 per cent in the first quarter.

But investors were now “positioning for inflation and tapering”, said BofA’s Jones, as the Biden administration’s $1.9tn stimulus jolts consumer prices higher. The Federal Reserve has also come under pressure to reduce its $120bn a month of bond purchases that have boosted markets through the pandemic.

“We’ve had a hell of a run in the market since last March,” said Patrick Spencer, vice-chair of equities at RW Baird. “But it is running out of oxygen. The higher you go, the harder it is to push forward.”

The more than 300 S&P listed companies that have reported first-quarter results so far have increased earnings per share by an average of 51 per cent compared with the same period in 2020, according to data compiled by Baird.

“It is phenomenal and you can’t keep going at this level,” added Spencer. “We’ll probably see earnings growth peak by the middle of this year.”

Investors were now using commodities and US government bonds to play the next stage of the economic recovery, BofA strategists commented.

They said the trade of 2021 would involve buying financial instruments that track the price of copper — which is in short supply following a swift resumption of demand in the US and Europe — while positioning for further falls in the prices of longer-dated US Treasury bonds, which offer lower investment returns as inflation rises.

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