Three “Data” items today:
Topic #1: US mutual fund and ETF investors (retail and small institutions) continue to buy equities and gold but sell bonds. The data here is from the Investment Company Institute (link below) for the week ending March 23rd:
- US equity inflows totaled $2.3 billion last week. That is down noticeably from the prior 2 weeks (+$12.5 bn and +$15.5 bn respectively), but still positive even as domestic stocks continued to climb their way out of their early-mid March lows.
- Non-US equity fund flows were also positive by $2.7 billion, the strongest inflows in 6 weeks.
- Bond funds are still seeing outflows ($1.5 billion). Last week’s redemptions were, however, much smaller than the last 3 weeks (negative $11 – $13 bn).
- Commodity fund (mostly physical gold) flows were positive again last week (+$1.9 billion) and have been solidly in the plus camp ($1 – $3 billion/week) all year.
Takeaway: US fund investors continue to position for higher inflation by adding to equity and gold exposures while trimming positions in fixed income. As we noted last week, they are not adding much new capital; trailing 4-week aggregate fund flows are slightly negative (-$2.2 billion) and this past week was barely positive (+$4.8 bn). On top of that, equity fund inflows have been chunky and focused on buying dips rather than consistently adding to equity weightings. That said, it is clear that US fund investors remain optimistic on stocks.
Item #2: The New York Fed was out today with a very thoughtful comparison of US and Eurozone post-Pandemic Crisis labor market recoveries. There is a link to the full report below, but here are the key points:
- Two years on from the depths of the crisis, both the EU and US labor markets have largely returned to pre-pandemic levels of unemployment (6 percent and 4 percent, respectively).
- The total number of workers, however, is very different. As of the end of 2021, the US workforce was smaller by 3.0 million people while the size of the EU workforce was larger by 600,000 people.
- The reason for this dichotomy comes down to how each region responded to the crisis. Countries in the European Union paid employers to keep workers on their payrolls. In the US, there was a short-term, indirect initiative (the Paycheck Protection Program) but for the most part the public policy response was to pay jobless workers a larger unemployment benefit. This created much more labor turnover in the US than in the EU.
- In addition, governments in the EU directly hired an incremental 1.3 million workers from Q4 2019 to Q4 2021. This helped cushion the labor market blow from reduced leisure and hospitality sector employment. In the US, government (mostly state and local) shed an aggregate 600,000 jobs over that same timeframe.
Takeaway: Europe’s response to the pandemic’s effect on local labor markets is so different from the US that we can compare inflation in both regions to isolate what effect America’s supercharged jobs market has had on prices. As of January 2022, it was 2.4 points (US: +7.5 pct, EU: +5.1 pct), or about a third (34 pct) of the difference. This is large enough that it says Chair Powell and the Fed are right to watch the level of job openings as a measure of wage and therefore price inflation pressures. They did not create the labor shortage – public policy did – but it will be part of their job to reduce it.
Topic #3: A quick update on how our “buy the S&P 500 when the VIX closes over 36” indicator is doing. The VIX hit that level on March 7th, and the S&P 500 is 9.5 percent higher since then. That’s far better than the average 1-month gain back to 1990 when the VIX hits 36, which is just 2.5 percent.
This leaves open the question of whether US large caps have run too far, since a 9.5 percent gain is well above the long run average pop. The chart below provides the context for an answer. It shows the last 5 years of the VIX (blue line, left axis) and the S&P 500 (red line, right axis). We’ve noted the very clear difference in VIX levels pre- and post-pandemic crisis.
There were just two +36 VIX spikes from 2017 – 2019: one related to fears of a global economic slowdown (Feb 2018) and the other when the market was concerned that the Fed was about to overtighten (December 2018). Those recession fears in February lingered over the next month, and the S&P 500 was only up 2.7 percent after its +36 VIX close. In the second case, Chair Powell very publicly reversed course in early January 2019 and the S&P was up 12.4 percent in the month after the +36 VIX close.
Takeaway: the mid-March global equity panic low that sent the VIX to +36 was caused by two issues, and only one is truly “solved”. Russia-Ukraine continues to be an overhang, both on the European economy/global supply chains and energy markets. On the plus side, Chinese policymakers seem to finally understand that their aggressive actions against their local Tech companies and capital markets ran the risk of crashing China’s equity markets; they have promised a steadier hand from now own.
The bottom line here is that the S&P’s 9.5 percent rally from the +36 VIX close likely has further to run over the next 10 days only if there is an almost-immediate resolution to the Russia – Ukraine crisis. We need something like January 2019’s Fed about-face, which cleared the market’s worries of a too-aggressive Fed. Otherwise, we risk giving back some gains in the next week or two. The February 2018 experience is the template there, when markets had no greater clarity over the state of the global economy a month after the +36 VIX close.