Look at a YTD price chart for the S&P 500 or any other large global equity market and you’d think that buyers stepped in on January 4th and have been there consistently ever since. The lows for the year were on the prior day and once Fed Chair Jay Powell expressed the central bank’s “patience” on rates, traders flipped from sellers to buyers.
Money flow data from the Investment Company Institute shows a very different story, however. Their numbers combine inflows/outflows from both long-term mutual funds and exchange traded funds, and here is what they say:
- Even though US equities led global equities higher, redemptions out of domestic stock funds totaled $21.1 billion for the month.
- MF/ETF investors were much more bullish on non-US equity markets, however, adding $10.0 billion in fresh assets in the first month of the year.
- Fund investors began to change their opinion of US stocks here. After Week 1 redemptions of $2.9 billion, the tide turned. For February as a whole they added $2.0 billion in new capital into domestic equity products.
- The worm turns the other way for non-US stocks, however, and after Week 1 inflows of $4.1 billion fund investors started to redeem out of these funds. Whole-month money flows for international equity funds totaled just $403 million.
March to-date (data through the 20th):
- MF/ETF investors finally embraced US stocks, adding $11.7 billion in fresh capital through the first 3 weeks of March. This is not enough to turn YTD money flows positive, but it signals a major shift from January’s bearishness.
- Selling of non-US equity MF/ETFs picked up steam, with redemptions totaling $5.2 billion month-to-date.
One additional important point about all this: don’t mistake mutual and exchange traded fund flows for reflecting only mom-and-pop retail investor money. For that, you need to look at just mutual funds, where January was strong for US stock funds (+$3.7 billion) but the rest of the year has trailed off (negative $10.8 billion in February, negative $10.2 billion for March-to-date).
The upshot from this analysis: aggregate MF/ETF money flows through Q1 2019 shows a clear narrative arc:
- Investors started the year with the belief that non-US stocks would benefit more from an easier Fed and a US-China trade deal than domestic equities. These were the dominant themes through the first 2 months of the quarter, so fair enough.
- Starting in late February, however, investors began to recognize that non-US economies were slowing more abruptly than previously expected. They hit pause on new non-US equity allocations.
- In March, as incoming global economic data worsened, they reversed course. US equities are now the place to be, or at least a better spot for capital than non-US stocks.
As far as what this means for the soon-to-start second quarter of 2019, we have three points:
#1. April 2019 is going to be tough to call because of 2017’s changes to the US personal tax code. Affluent investors may have to sell securities to pay for unexpectedly large Federal income tax bills now that there are limits on the deductibility of state and local income taxes.
#2. Equity funds – both US and non-US – could see competition for capital from fixed income products. Flows here have been robust all year ($103 billion YTD) and further declines in interest rates will create performance-chasing pressures. It shouldn’t work that way, but performance begets flows. Always has…
#3. MF/ETF investors have been on a disappointing ride with respect to non-US equities over the last +2 years, and the flow data shows their patience is wearing thin. In 2017, total inflows into the space were $237 billion. Last year, when non-US stocks drastically underperformed US equities, inflows dwindled to $10 billion. This year, hope sprang eternal in January but now that non-US stocks are once again lagging the flows are turning negative. When they really get going to the downside, that will be an investable bottom for non-US stocks. But not before.