Billions Flee Stock Funds Amid ‘Appalling’ Risk Sentiment

Risk sentiment is “appalling,” BofA’s Michael Hartnett declared. Or despaired.

Investors ditched stocks over the latest weekly reporting period, according to EPFR data summarized by Hartnett. Nearly $15 billion fled global equity funds on the heels of a three-week losing streak, the worst since June (figure below).

On an equal-weighted basis, Hartnett noted, global shares are back on the lows.

Yields, meanwhile, are at or near new cycle highs. The US economy hasn’t succumbed to recession yet and Europe is poised to deliver hundreds of billions in fiscal stimulus to help cushion the blow from the energy shock.

“There’s inflation, there’s a war, central banks are still tightening, yields in nominal terms are still low and yields in real terms are still negative,” Hartnett went on to say. The implication is that yields can go higher still.

The read-through from that conjuncture for risk sentiment isn’t great, and the dour mood is reflected in equity flows. US stock funds saw the largest weekly exodus in 11 weeks through Wednesday, at nearly $11 billion. European stock funds shed $2.5 billion, and are mired in (another) run of outflows (figure on the right, below).

Overall, global equity funds saw some $14.5 billion flee, the most since June (figure on the left). Over two weeks, nearly $25 billion left stock funds globally.

The “mass inflow to stocks from November 2020 to February 2022 has ended,” Hartnett said, noting that on net, there were “no inflows” over the past six months.

On an annualized basis, though, 2022 remains one of the strongest years for equity inflows since the financial crisis, despite recent bloodletting. Although nowhere near last year’s near $1 trillion haul, this year’s ~$250 billion inflow ranks in the top five going back almost two decades.

It’s worth noting that BofA Securities clients have been net sellers for three consecutive weeks. Last week saw the largest outflow since June, at $1.9 billion.

Clients sold both ETFs and single stocks, the bank’s Jill Carey Hill wrote, in a note out earlier this week. All client groups were net sellers (figure above).

Hartnett reiterated a cautious outlook. “[The] price of money is set to rise further” this year and next, he said, suggesting that’ll translate to more volatility and credit events.

So far, anyway, it doesn’t appear that the looming buyback excise tax is compelling corporates to bring forward repurchase activity in any significant way. BofA’s corporate clients slowed buybacks last week following what Carey Hall described as “a big pickup in August.”

Although the forthcoming tax “could cause some pull-forward in buybacks… so far, there’s no clear evidence that tax changes are impacting behavior,” she said, noting that “the recent pickup prior to last week was just slightly above historical seasonal trends,” and even that impulse looks underwhelming in the context of “much weaker-than-usual trends throughout Q2 earnings season.”

Meanwhile, the bank’s pseudo-famous “Bull & Bear Indicator” is back to 0.0, after briefly ticking higher. That’s indicative of “extreme” bearishness and is usually a contrarian “buy” signal. But maybe not right now.