Figures out last week reveal, quite sharply, just how investors abandoned US sharemarkets in August in favour of bonds, helping drive yields down to multi-year highs in the US in particular.
The so-called perfect storm of rising trade tensions with China, geopolitical uncertainty in the Middle East and weak US and European economic data badly damaged investor sentiment in August, triggering a stampede out of share funds and into bond funds at a record-setting rate.
According to US financial consultancy, TrimTabs, the disparity between equity fund outflows and bond fund inflows was the largest on record. Trim Tabs has been tracking these flows for 13 years – going back to 2006.
According to Trim Tabs data, equity exchange-traded funds and mutual funds saw outflows of $US52 billion in August, versus $US29 billion of bond-fund inflows, for a total difference of $US81 billion.
The next largest divergence occurred in October 2013, when there was an inflow to equity funds of $US51.5 billion and an outflow from bonds of $US19.2 billion, a difference of $US70.7 billion.
On net, TrimTabs data shows investors pulled $US5.8 billion from Exchange Traded Funds (ETFs) in August, pushing year-to-date inflows down to $US147.9 billion, 15% less than the $US173.7 billion at the end of August 2018.
Equities were hit hard by outflows – nearly $US22 billion left US and international equity ETFs while fixed income ETFs picked up almost $US12 billion, and $US3.8 billion headed for commodity ETFs (gold being the main attraction, followed by silver).
The Dow lost 1.7% in August, the S&P 500 fell 1.8% and Nasdaq dropped 2.8%.
But since the start of September, the trend has been up – last week the Dow rose 1.5%, while the S&P 500 and Nasdaq both rose 1.8%
But despite that, outflows from equity funds continues.
According to data from EPFR Global and the Bank of America investors pulled $US8.4 billion from equity exchange-traded funds and mutual funds in the week to last Thursday, September 4.
At the same time, they shoved more than $US11 billion into bond funds, though some analysts wonder if the fairly solid jobs report for August and the growing belief the Fed will cut rates next week, will change sentiment.
But the bearishness of fund investors has seen Bank of America’s bull and bear indicator flashing a strong, contrarian buy signal. “We are bullish,” wrote Michael Hartnett, chief investment strategist at Bank of America in a Friday note to clients.
He pointed out that since 2000, when the Bank of America bull and bear indicator flashed “buy” signals, the median performance for global stocks was a rise of 6.3% over the subsequent three months, while the 10-year U.S. Treasury yield typically rose by 50 basis points.
“We say the S&P 500 index and the MSCI All Country World index will retest all-time highs,” Harnett wrote, according to a report in marketwatch.com.
Another rate cut from the Fed and signs of progress on Trump’s trade war with China could give sentiment a major boost in coming weeks, but Brexit remains a big unknown, especially in Europe.
