Tiny Taper Tantrum, Or Just “August”?

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Tiny Taper Tantrum, Or Just “August”?

Three Data items today:

#1: A few thoughts about today’s selloff:

The VIX seasonality work we showed you at the end of June remains relevant. July and August both tend to have higher CBOE VIX levels than June month end, with early and late August having the highest relative implied volatility versus the end of Q2. The pattern here is persistent across the 3 decades since 1990. “Peak summer vol” tends to come in the last week of August, driven by low market volumes around the end of summer vacation season.

US large caps have, thus far (July and August), been able to buck the usual relationship between higher volatility and lower prices. That’s because we’ve had very low sector correlations to the market and heavyweight groups (Tech and Health Care) have alternated leading the market higher. Today’s selloff saw both groups down more than the market, and only one sector show absolute gains (Consumer Discretionary, thanks purely to Lowe’s positive earnings report).

Today was a 1 percent down day (-1.07 pct, to be precise), which feels like an outsized move but history says is not unusual. On average, the S&P has had one 1-percent move (up or down) every week since 1957. We’ve only had 3 so far in the 7 weeks of Q3 2021. Periods of slack 1-percent day volatility tend to be good ones for equity returns, but when they crop up in recently quiet markets they certainly feel like something has “changed”.

Takeaway: as much as we like US equities, we have to respect both the tape (suddenly higher correlations) and seasonality (late August volatility). Both tell us to be cautious over the next 2-3 weeks.

#2: As much as retail investors have become an increasingly visible feature of the US equity landscape, general interest in the stock market is clearly waning.

Here is a chart of US Google search volumes for “invest” and “buy stocks” back to July 2019. We’ve highlighted January 2021’s peak, which came during that month’s selloff and right around the last round of stimulus checks. The trendline since is clearly to lower lows. The most recent complete-week readings (32 for “invest, 12 for “buy stocks, August 8-14) are the same as February 2020.

Takeaway: while Americans who already have a brokerage account aren’t likely to use these terms, potential new investors certainly are. That’s why Robinhood and Schwab have ads placed on Google’s first page of search results for “buy stocks”. Their existing clients – and every other brokerage firm – will continue to be a force in individual stocks and (occasionally) the market. But the great brokerage account land rush of 2020 – 2021 appears to be over for now.

#3: It’s Wednesday, so it is also “US fund flow analysis day”. That’s not our choice; Wednesday is when the Investment Company Institute releases their data for the prior week (link below). This includes both US-listed mutual fund and exchange traded fund flows, so it is comprehensive look at where retail and smaller institutional investors are putting incremental money to work.

The highlights from the ICI’s latest data:

  • US fund investors continue their flip-flopping ways when it comes to committing fresh capital to US equity products. Every week through Q3-to-date they have alternated between adding new money to the asset class and taking capital out. Last week was no different: $762 million of inflows after $4.0 billion of outflows the prior week. That puts August on pace for another month of redemptions after July’s $10.2 bn of outflows.
  • They are, at least, still adding to their non-US equity holdings, with $4.0 bn of inflows last week. That’s not as large as the prior week’s $11.9 bn of purchases, but US fund investors have consistently add to non-US stock fund positions since Q2 2021.
  • Fund investors are also adding to their fixed income holdings, with $14.0 bn in purchases last week. That is the highest weekly amount thus far in Q3, which tells us investors have given up waiting for rates to rise.
  • Commodity funds (mostly physical gold) saw $113 million of fresh money come in last week, after inflows of $247 mn the week before. Q3 flows have been spotty for this asset class, so seeing 2 weeks in a row of inflows is good news for precious metals.

Takeaway: after a flurry of inflows in February and March 2021, totaling $98 billion, US equity fund flows look a lot more like their pre-pandemic self – a slow drip of capital shifting from stock to bond funds. Stock buybacks, which we expect will average $200 bn/quarter in the second half of 2021, should more than take the place of fund outflows (2019 average of $42 bn/quarter). As for the pickup in fixed income flows last week, it reminds us that even at low yields there is still investor appetite for bonds.

Sources:

ICI Money Flow Data: https://www.ici.org/research/stats/weekly-combined