Money Flows, Gas, and The Wall Of Worry

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Money Flows, Gas, and The Wall Of Worry

Three Data items today:

#1: Mutual and exchange traded fund money flows for 2020. The Investment Company Institute data is now available through December 29th, so we have a pretty good sense of the aggregate money flow numbers for the year.

At the very top of the house, net capital flows for mutual funds and ETFs were essentially zero last year, at negative $24 billion.

  • This is sharply lower than 2019’s net inflows of $224 bn.
  • It is, however, in line with 2018’s outflows of $35 billion (caused by investors pulling capital in Q4 due to concerns over Fed policy).
  • 2020’s money flows were really a tale of 1 month – March’s $341 bn in redemptions – and the other 11 months, which had net inflows almost enough to fill that gap.

Drilling down into how fund investors allocated marginal capital in 2020, we find a familiar story to past years:

  • Fund investors sold a net $361 bn of equity products, comprised of $248 bn in net domestic equity fund redemptions and $113 bn in non-US stock fund sales.
  • They purchased a net $369 bn in fixed income funds. It’s worth noting that the huge March 2020 redemptions noted above ($341 bn) were mostly out of bond, not stock funds, ($274 bn fixed income outflows that month).
  • Commodity funds built on a decent 2019 in terms of capital inflows (+$8.4 billion) with $44.2 bn of further net purchases in 2020. These are predominantly physical gold funds and were responsible for most of the global incremental demand for the yellow metal last year.

Takeaway: lost in the common market narrative that “the Fed’s policies keep interest rates low” is the simple fact that US fund investors have been swapping out of stocks and into bonds for years now, and in serious size. One wonders where the S&P 500 would be today if that were not the case, but the effect on rates across duration and credit spectrum is clear enough. Other liquidity sources have pushed stocks higher (buybacks, and more recently retail investors), which goes to show that fund flows on their own remain just one piece of the capital markets puzzle.

#2: VIX term structure for the first half of 2021. The spot VIX – which only looks out 30 days – closed today at 22, not far from its long-run average of 19.3. At first blush that might seem comforting…

But here is the VIX term structure, which shows where the options market is pricing US stock market volatility out through August 2021. Today’s close is that green dotted line at the bottom. The rest of the out-month observations are in blue. As you can see, they climb fairly quickly to 25 in February and stay there past mid-year.

Takeaway: options markets are not convinced that the strong start to 2021 is sustainable. Fair enough, we say. But in that graph above you can actually see the “wall of worry” (January to March) that bull markets have to climb according the old Wall Street adage. This is not a complacent market, for all the easy returns that have been on offer of late. Not at least according to the VIX chart, anyway. That makes VIX futures as much of a contrarian bullish signal as warning sign of things to come.

#3: Gasoline demand as high-frequency indicator of the US economy. The US Energy Information Administration tallies this data weekly, and we now have the final week of 2020.

The sort-of good news is that the final week of last year saw gasoline demand fall by 8.5 percent versus last year, which is better than the 4-week average decline of 11.9 percent. This supports other data (TSA airport checks, for example) that the Christmas – New Year’s week saw more personal mobility than the run-up to the end of the year.

The bad news is that we’re still not really closing the gap to 2019. The chart below is the EIA’s 4-week average data for 2019 (brown) and 2020 (blue). There’s a fair amount of seasonality, which the 2019 line shows (peak in August at 9.7 mm barrels/day, trough in December at 8.5 mm barrels/day). But 2020’s trend line seems to be breaking further away from 2019 as we close out the year.

Takeaway: this is a decent way to think about how far the US economy has to go to get back to normal. When Americans drive 10 percent more, to go out to eat or see a movie or visit with friends, that’s when the economy will be able to fully recover. That doesn’t seem like a lot, which is one reason why equity markets are resilient. But… It will still take a widespread vaccine rollout to get us there.