June 9, 2017

U.S. Weekly FundFlows Insight Report: Equity Fund Investors Take a Breather Before “Super Thursday”

by Tom Roseen

After pushing the market indices to new highs at the beginning of Thomson Reuters Lipper’s fund-flows week ended June 7, 2017, investors began to take a wait-and-see approach ahead of what many in the mainstream media are calling “Super Thursday,” when ex-FBI director James Comey is scheduled to testify before Congress, the European Central Bank holds its policy meeting, and the U.K. holds general elections. Despite the increased uncertainty, market indices were able to remain on the plus-side for the flows week, with the Dow Jones Industrial Average gaining 0.79% and the Russell 2000 Price Only Index gaining 2.85%. Shrugging off a large slide in oil prices and a somewhat discouraging May nonfarm payrolls report during the week, investors embraced news of a slight improvement in the May ISM Manufacturing Index and breathed a sigh of relief after the release of Comey’s prepared testimony before Congress. However, as has been the case recently, equity fund investors remained hesitant.

Weekly Wrap-Up

For the second week in a row investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting $7.8 billion. While investors were net redeemers of equity funds, pulling out $5.0 billion for the week, they were net purchasers of taxable bond funds (+$7.3 billion), money market funds (+$4.5 billion), and municipal bond funds (+$1.0 billion).

At the beginning of the fund-flows week the markets were bolstered by a private-sector employment report that came in better than expected. While news of April construction spending disappointed, investors pushed U.S. stocks to new highs on the news that the May ISM manufacturing index rose slightly to 54.9%, still signaling economic growth. Despite a large decline in oil prices—partially caused by concerns that President Donald Trump’s withdrawal from the Paris climate accord could lead to increased oil output by U.S. firms—and a disappointing nonfarm payrolls report, U.S. stock market indices closed at record highs once again on Friday, June 2, led by technology shares. The Labor Department reported that the U.S. had created 138,000 new jobs for May (coming in below analyst expectations of 182,000), and the unemployment rate ticked down to 4.3%. Notwithstanding the lower-than-expected new jobs creation, most pundits still believed the Federal Reserve will raise its short-term interest rate on June 14. The CME FedWatch Tool still placed the probability of a rate hike at 91%.

On Monday, June 5, investors took their collective foot off the pedal to ponder the upcoming testimony by Comey, the U.K. general election, and the ECB policy meeting. European and global markets were reeling from the terrorist attack near London Bridge over the weekend, which left seven dead and many critically injured.

Further sobering investors in the U.S., factory orders were down 0.2% for April and May’s ISM services index declined 0.6% but remained solidly in expansionary territory (+56.9). Near-month crude oil prices took another hit after Saudi Arabia, Egypt, and other countries cut ties with Qatar, accusing the country of interfering in internal affairs and supporting terrorism. Investors became slightly more cautious Tuesday, bidding up Treasuries, gold, and the Japanese yen. On Wednesday markets once again began to rally, despite continued concerns about the upcoming “Super Thursday” events, a report by the Energy Information Agency that showed crude-oil stockpiles rose unexpectedly the prior week (weighing on energy stocks and oil prices), and the upcoming Fed policy meeting.

Exchange-Traded Funds

For the second week in three equity ETFs witnessed net outflows, handing back just a little over $1.9 billion for the flows week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$3.3 billion), redeeming money from the group for the fifth week in six. For the twenty-fourth week running nondomestic equity ETFs witnessed net inflows, this past week attracting $1.4 billion. SPDR Gold ETF (+$737 million), Consumer Staples Select Sector SPDR ETF (+$729 million), and iShares Russell 2000 ETF (+$471 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum SPDR S&P 500 ETF (-$2.4 billion) experienced the largest individual net redemptions, and iShares Edge MSCI USA Quality Factor ETF (-$0.7 billion) suffered the second largest net redemptions for the week.

Conventional Equity Funds

For the eleventh consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $3.1 billion. Domestic equity funds, handing back a little more than $2.9 billion, witnessed their twenty-third week of net outflows despite posting a 0.95% return on average for the flows week. Meanwhile, their nondomestic equity fund counterparts, also posting a 0.95% return on average, witnessed net outflows (-$220 million) for the fourth week in five. On the domestic equity side fund investors continued to lighten up on large-cap funds (-$1.4 billion net), while on the nondomestic side they shunned international equity funds (-$119 million).

Conventional Fixed Income Funds

For the seventh week in eight taxable bond funds (ex-ETFs) witnessed net inflows, taking in $3.5 billion. Corporate investment-grade debt funds witnessed the largest net inflows of the group, taking in $2.6 billion, while corporate high-yield funds (+$255 million) and flexible portfolio funds (+$259 million) witnessed the next largest net inflows. Balanced funds (-$229 million) witnessed the only net redemptions of the group for the week. With investors pricing in the probability of a June rate hike at 91%, according to the CME FedWatch Tool, it wasn’t too surprising to see Lipper’s Inflation-Protected Bond Funds classification taking in net new money for the thirty-first consecutive week (+$67 million) and bank loan funds (+$294 million) witnessing net inflows for the twenty-ninth week in thirty. For the eighth week in nine municipal bond funds (ex-ETFs) witnessed net inflows, taking in some $871 million for the week.

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