Investors around the globe withdrew money from equity funds in the week ended March 20, continuing a trend that has colored stock markets since the start of the year, even as major benchmarks have rallied aggressively, according to data from EPFR Global and Bank of America Merrill Lynch.
There’s “simply no love for stocks” in today’s environment among mutual fund and ETF investors, Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, wrote in a note to clients.
In contrast, such investors are showing a “need for yield” that has led to inflows of more than $10 billion corporate debt, “a big contrast to outflows of $13.2 billion from U.S. stocks, $4 billion from EU stocks and $0.4 billion from emerging market stocks,” he wrote.
Such equity fund outflows have been the norm throughout 2019, with U.S. equity funds posting 8 weeks of outflows over the past 12 weeks “as investors continue to sell into recent gains for the U.S. equity markets,” wrote Cameron Brandt director of research at EPFR Global, in an email.
“With 11 weeks of the first quarter gone, flows for EPFR-tracked equity and bond Funds continue to head briskly in opposite directions,” he added. “Year-to-date, bond funds have — based on weekly data — absorbed a net $118 billion while equity funds have seen over $60 billion flow out.”
Brandt notes that these outflows exist in contrast to the performance of major stock benchmarks in the U.S. and in other developed economies.
“Going into the final days of the first quarter of 2019, the Dow Jones Industrial Average DJIA, -1.77% was up over 18% from its late-December trough, and the EuroStoxx 50 SX5E, -1.83% was up nearly 14%,” he wrote. “But investors continue to heed the bearish message about the U.S. and global economies being sent by [bond markets]”
Throughout the year, bond yields have generally fallen, suggesting investor skepticism toward the future health of the economy. A global bond rally on Friday sent the yield on the 10-year German government bond, or bund, below 0% for the first time since 2016, while a key measure of the U.S. yield curve inverted as the yield on the 10-year Treasury note sank below the yield of the three-month T-bill, heightening recession fears and accelerating a stock-market selloff.
Read: The yield curve inverted — here are 5 things investors need to know
Also see: Amount of global debt yielding less than 0% approaching $10 billion
The first-quarter stock rally has been led by the strong performance for sectors like information technology, which is typically seen as a cyclical investment that indicates investor confidence in the future health of the economy. The information technology sector, as measured by the Technology Select Sector SPDR fund XLK, -2.36% has been the best performing so far this year, rising 19.3% versus the S&P 500’s SPX, -1.90% 12.5% rise, according to FactSet.
While some commentators have argued that a stock market rally that occurs while so many investors remain on the sidelines is a fragile one, Bank of America’s Harnett “remains bullish,” predicting that the S&P 500 will rise above 3,000 in the first half of 2019, spurred in part by fund investors returning from the sidelines and by recent shifts in Federal Reserve policy meant to convince markets that interest rates won’t be rising soon.