Blame it on the sheer scope of Q4’s drawdown or, relatedly, on how jaded and betrayed some investors probably feel after nearly a decade of uninterrupted gains (a couple of brief hiccups notwithstanding). But the fact is, not everyone has been on board in 2019. Indeed, the bull case from here rests, at least in part, on the idea that FOMO will get the best of whatever fundamental/discretionary investors are still sidelined and a combination of persistently low vol. and “in-trend” markets will ultimately force (more) systematic re-risking.
Of course, the game changed a bit this week, following Donald Trump’s latest (he would probably call it “greatest”) tariff escalation, but generally speaking, the assessment outlined above still stands.
Well, on Friday evening, Goldman’s David Kostin was out with a look at just how unusual it is for stocks to be up more than 10% for a four-month period whole equity fund flows have been negative to the tune of $20 billion or more.
As it turns out, that’s only happened two other times in 15 years.
So far in 2019, outflows of $70 billion from active mutual funds have more than offset the $35 billion that’s gone into passive mutual funds and ETFs.
Who, exactly, has been selling?
The short answer is retail investors. “Retail-focused equity mutual funds have seen $60 billion of outflows YTD [while] institutional-focused equity mutual funds have experienced inflows of $15 billion”, Goldman writes.
Ok, so who’s buying?
Well, asset managers, systematic strats and, of course, corporate management teams. To wit, from Goldman:
High frequency data from the Goldman Sachs Corporate Trading Desk indicate share repurchase executions have climbed 26% year/year, including a surge this week alongside the equity market decline of 2%. Our Sentiment Indicator, which tracks from 0 to 100 based on institutional investor net futures length relative to the previous 12 months, has equaled 100 in six of the past eight weeks. The Goldman Sachs Equity Strats Desk estimates that systematic funds have purchased $350 billion of stocks in 2019.
But retail isn’t alone in selling US stocks amid the rally. Foreign investors, mutual funds and pension funds have been sellers as well. Foreigners dumped $42 billion of US equities in January and February and as Goldman observes, “February was the 10th consecutive month that foreign investors sold US stocks, the longest streak on record.”
Who, then, will be the marginal buyer going forward? Retail is obviously one possibility. After all, mom and pop have a tendency to buy after the fact – i.e., they become net buyers once they see stocks posting strong gains, a propensity which leads to bag-holding.
As for foreign investors, pension funds and mutual funds, Goldman isn’t particularly optimistic. Foreigners’ appetite could increase going forward, but that at least partially depends on the trajectory of the dollar. The improvement in funded levels for pension funds likely means they won’t feel compelled to increase their allocation and as far as mutual funds go, the epochal active-to-passive shift bodes poorly.
The worst news is that if you roll up pension funds, households, foreign investors and mutual funds, their allocation to equities still sits in the 87th percentile, which, in short, means this (from Goldman):
In general, there is limited combined firepower to buy stocks since allocation to equities across major investors is near its all-time high.
But that’s fine, because there’s always buybacks!
Goldman still sees net corporate equity demand at $600 billion in 2019 (gross buybacks at $940 billion for the S&P). And the punchline is that when it comes to who is most predisposed to buying at all-time highs, you can point the finger at corporations. To wit:
Buybacks have, by far, been the largest source of equity demand after the equity market reaches new highs and continues to rise. Since 1990, there have been five key episodes when the S&P 500 touched a three-year high and rose by at least 10% in the following 12 months (1991-92, 1995-2000, 2005-07, 2012-15, 2016-18). Corporate repurchases as a share of market cap have been four times larger than any other source of equity demand during these episodes.