“The only time to worry about stocks is when US equity fund flows turn positive”, DataTrek’s Nicholas Colas said Thursday.
It’s a good thing — because flows are negative, and the S&P is one or two decent sessions from notching a new record high, putting the pandemic plunge in the rearview once, if not for all.
Colas was referring to the latest ICI data, which shows that July witnessed the largest outflows from equity mutual funds and ETFs since December 2018, in aggregate. For domestic products, July’s exodus matched (basically) February 2018, when the VIX ETP complex imploded, triggering a correction for stocks which, just a month previous, rode the adrenaline rush from the Trump tax cuts to an eye-popping melt-up. (In the visual below, the S&P is plotted monthly, which accounts for the appearance of a record high as of Friday’s close.)
BofA flagged $7.4 billion of outflows from stocks last week, the most in nearly three months, while Bloomberg’s data shows almost $4 billion fleeing ETFs over the period.
This, apparently, is good news. “July’s outflows are very bullish for US equities”, the above-mentioned Colas went on to say late last week. It’s time to worry when investors are pouring money into stocks, as that’s “a very good contrarian indicator”.
As Colas notes (and as most readers are doubtlessly aware), trepidation as exemplified in equity fund flows is nothing new. This is a long-running trend. But, at a time when those of a bullish persuasion of looking for a reason to stay constructive on stocks, it’s ostensibly encouraging that the awe-inspiring rebound off the March panic lows isn’t tempting the huddled masses to engage (probably because they’re tired and poor).
Bloomberg’s Lu Wang explains the rationale in colloquial terms. “Usually the sight of a major stock index nearing an all-time high is an encouragement to bulls, pulling in money as markets start to dominate dinner-table chatter”, he wrote Friday. “No such celebration is happening now, going by measures of fund flows”.
Those of you keeping track of recent developments might be inclined to suggest that fund flow data is less relevant than it once was.
After all, we live in a world of Robinhood traders run amok and bored sports junkies substituting zero-commission day-trading for the over-under.
“The older cohorts of the US retail investors’ universe tend to invest in equities via equity funds [while] the newer cohorts including millennials prefer to invest directly in individual equities”, JPMorgan’s Nikolaos Panigirtzoglou wrote, in a June note, adding that “the weaker flow picture in equity funds suggests older generations of US retail investors have been so far more cautious on equities than the new generation as they have preferred to deploy their excess liquidity to bond funds to perhaps take advantage of the value that still exists in credit”.
That preference for credit continued unabated last week. As noted here on Thursday evening, Lipper’s data showed investment grade funds raking in another $7 billion+, while junk funds enjoyed their eighth largest haul on record.
All told, inflows into IG and high yield funds on Lipper’s data were more than $11.5 billion last week.
“Huge credit inflows continue”, BofA said Thursday, citing $17 billion on EPFR’s data and $230 billion over the past three months.
Some of the optimism around credit is doubtlessly attributable to the Fed’s explicit backstop for corporate bonds. I suppose one thing that could get “older generations of US retail investors” (to quote JPMorgan) interested in equities would be for the Fed to start buying, which some say is all but inevitable once the next major selloff comes calling.
“Minimal growth = maximum liquidity = maximum bullish”, BofA’s Michael Hartnett said Thursday, in the course of writing that the “narrative of the 2010s [has] harden[ed] in 2020 as a massive Wall Street recovery coincides with Main Street recession”.
And maybe that explains the lack of interest in stocks evident in the recent equity fund flow data. It could simply be that most people aren’t enamored with the idea of plowing money into shares when their own economic prospects are more indeterminate than at any other time in their lives.
But, for those fortunate enough to have a job and superfluous cash sitting around, I guess it makes sense to bet on a continuation of the central bank-inspired surge. As BofA’s Hartnett puts it, describing the disconnect between Wall Street and Main Street and the read-through from the latter’s trials and tribulations for stimulus, “I’m so bearish, I’m bullish”.