Are Stocks Done For The Year?

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Are Stocks Done For The Year?

With another month in the books for 2019, it’s time to look at how fund investor money flows shifted through November. As the data below shows, investors were busy last month. We use two sources here: the Investment Company Institute (through 11/20) and www.xtf.com (just ETF data, through 11/29).

We have 3 points to highlight:

#1: Total mutual/exchange traded fund flows were stronger in November than most of 2019, but all that capital (and then some) went to bonds:

  • Total fund inflows through the first 3 weeks of November were $21.5 billion. Weekly flows have been positive since mid-October and, assuming this trend continued through the last 6 days of the month, total flows should reach approximately $25 billion.
  • Even if the last week of November is flat, total inflows would still be stronger than October ($13.8 billion) or 2019’s monthly average inflows of $16.5 billion.
  • As has been the case in all but one month (February) this year, more than 100% of November’s inflows went to fixed income funds. Through the first three weeks of the month, bond funds saw $32.5 billion of inflows but equity products had $8.5 billion of outflows.

Takeaway: November’s fund flows fit the broad narrative of an aging US investor base shifting assets from stocks to bonds, the latest chapter in a trend that goes back many years. We are reminded of a San Francisco Fed paper from 2011 (link at the end of this section), which posited that US equity valuations would suffer from this change. That idea has not aged well thanks to ultra-low global interest/discount rates, but the Fed paper certainly called the trend in fund flows accurately.

#2: Equity fund investors actually warmed to non-US stocks last month:

  • For most of this year (January being the exception) fund investors have sold down holdings in non-US stocks every month by an average of $5 billion in each period.
  • November looks set to break that trend, with $9.6 billion of inflows through the first 3 weeks.
  • That has occurred even as US stocks outperformed both EAFE (non-US economies) and Emerging Markets in November.

Takeaway: we suspect this is happening because investors believe non-US stocks are cheap enough to nibble on just now, but we’ve also spent time refuting this idea in recent weeks. EAFE and EM valuations are inexpensive for a reason (slower economic growth, less Tech exposure, etc.) and PE ratios alone don’t tell the full story. Still, someone is apparently listening to the EAFE/EM bulls…

#3: Looking just at ETF fund flows for November we can see where investor interest is waxing and waning by investment styles and sectors:

  • Growth equity ETFs: +$829 million
  • Momentum equity ETFs: -$269 million
  • Value equity ETFs: +$3.2 billion
  • Dividend equity ETFs: +$4.3 billion
  • US Large Cap equity ETFs: +$8.8 billion
  • US Small Cap equity: +2.9 billion
  • Largest US equity sector inflows: Technology (+$1.5 billion), Financials (+$2.1 billion), Industrials (+$958 million), Real Estate (+$822 million) and Energy (+$498 million)
  • Largest US equity sector outflows: Consumer Staples (-$747 million), Utilities (-$202 million) and Consumer Cyclicals (-$39.5 million)
  • Investment grade corporate ETF inflows: +1.8 billion
  • High yield corporate ETF outflows: -$224 million

Takeaway: November’s ETF flows skewed strongly to “Value” both in terms of equity investment styles and sectors but clustered in higher quality corporate credits within fixed income. That’s odd, because the same confidence in a stronger 2020 global economy that pushes capital into Financials, Industrials and Energy should also favor high yield corporate debt.

Finally, let’s rewind the clock and compare recent money flow trends to what happened in Q4 2018:

  • Last December was one of the worst months for mutual/exchange traded fund flows this decade, with $134 billion of outflows that hit both equity (-$57 billion) and fixed income (-$49 billion) products.
  • Important to note: December 2018’s outsized redemptions, which partly caused the global equity meltdown that month, came after 2 months of smaller outflows. October 2018 saw $50 billion of aggregate fund redemptions, and November logged $17 billion of outflows.
  • Translation: last December’s global equity volatility did not come entirely out of the blue. Fund investors were already twitchy going into the month, even selling down fixed income exposure (something that rarely happens).
  • Thankfully, we don’t have the same setup going into December 2019. Fund flows were positive in both October (+$14 billion) and November (+$22 billion through the first 3 weeks).

Takeaway and conclusion: as much as it may feel that US equities have pulled forward any December rally, total fund flows indicate little worry among fund investors about an imminent selloff. Even today’s decline, with the S&P 500 down 86 basis points, did not breach the 1% change that marks “real” volatility in our book. We still expect US stocks to end the year on a positive note.

Sources:

SF Fed Paper on demographics and stock valuations: https://www.frbsf.org/economic-research/publications/economic-letter/2011/august/boomer-retirement-us-equity-markets/

ICI Statistics: https://www.ici.org/research/stats