Despite the looming decision by the Federal Reserve Board to raise interest rates for the first time this year, investors pushed the broad-based indices to new highs in four of the five trading days during the flows week ended Wednesday, December 14, 2016. Markets continued their post-election ascent, with one minor setback, as the Federal Open Market Committee raised its prime lending rate 25 basis points as expected and forecasted three more hikes in 2017, compared to the two that had been anticipated at its September meeting.
On Thursday, December 8, investors cheered the European Central Bank’s leaving its key lending rate steady, even though it hinted at tapering its asset purchases next April. The weakening of the euro against the U.S. dollar after the ECB announcement did cause some concern. However, investors remained hopeful that President-elect Donald Trump’s policies will stimulate economic growth. On Friday investors pushed the Dow Jones Industrial Average to its fifth consecutive week of gains and the S&P 500 to its best winning streak since June 2014, closing at another record high. Oil prices rose ahead of Saturday’s meeting between non-OPEC oil producers and OPEC. On Monday the Dow hit another record high, but the other indices sagged, with tech issues weighing on the NASDAQ as investors took a wait-and-see approach ahead of the FOMC’s two-day policy meeting. Energy issues rose after oil producers inside and outside of OPEC agreed to an output reduction over the weekend. On Tuesday the broad-based indices once again rose to new highs as oil prices settled slightly below the $53/barrel mark and as strong readings from Chinese industrial production and retail sales showed China’s economy had steadied in November. While most investors widely expected the Fed to raise its key lending rate in December at the close of its policy meeting on Wednesday (which it did), some were taken off guard by the number of expected hikes for 2017. Adding some uncertainty to the equation, the Fed forecasted three hikes instead of two, but it said it would raise rates only when the economy is strong enough. This—along with a decline in oil futures prices caused by an OPEC report showing members’ oil output rose in November, casting a pall over the recent agreement—weighed on equities at the end of the flows week.
For the first week in five fund investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), withdrawing $5.3 billion for the fund-flows week. Investors padded the coffers of equity funds (+$6.8 billion), but they were net redeemers of municipal bond funds (-$2.0 billion), money market funds (-$4.4 billion), and taxable bond funds (-$5.8 billion).
For the tenth consecutive week equity ETFs witnessed net inflows, taking in just a little under $18.0 billion for the flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$15.1 billion), injecting money into the group for the sixth week in a row. Meanwhile, for the third consecutive week nondomestic equity ETFs also witnessed net inflows, this past week attracting $2.9 billion. SPDR S&P 500 ETF (+$8.3 million), PowerShares QQQ Trust 1 (+$2.1 billion), and iShares Core S&P 500 ETF (+$1.0 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum SPDR Gold ETF (-$532 million) experienced the largest net redemptions, and Health Care Select Sector SPDR ETF (-$507 million) suffered the second largest net redemptions for the week.
For the fortieth week running conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $11.1 billion (their second largest weekly net redemptions this year). Domestic equity funds, handing back a little less than $8.4 billion, witnessed their forty-fifth consecutive week of net outflows and posted a 0.01% gain for the flows week. Meanwhile, their nondomestic equity fund counterparts, posting a negative 0.57% return for the week, witnessed net outflows (-$2.8 billion) for the fourth week running. On the domestic equity side fund investors lightened up on large-cap funds (-$6.8 billion net), while on the nondomestic side they shunned international equity funds (-$1.7 billion) and global equity funds (-$1.1 billion).
For the sixth week in seven taxable bond funds (ex-ETFs) witnessed net outflows, handing back a little more than $7.0 billion. Flexible portfolio funds witnessed the largest net outflows of the group, handing back $6.7 billion, while government-mortgage debt funds witnessed the next largest net outflows (-$0.9 billion). Corporate high-yield debt funds experienced the largest net inflows, taking in $1.9 billion for the week. With investors pricing in a 100% chance of a December rate hike, it wasn’t too surprising to see Thomson Reuters Lipper’s Inflation-Protected Bond Funds classification taking in money for the sixth consecutive week (+$111 million) and bank loan funds witnessing their fifth week of net inflows, attracting some $902 million for the week. For the fifth week in a row municipal bond funds (ex-ETFs) witnessed net outflows, this past week handing back $2.1 billion.