Add one more paradox to a market that seemingly refuses to follow any logic.
In a week in which the S&P did not suffer one down day despite the “Cohn Gone” scare and Trump’s trade war announcement, US stocks suffered “massive” – in Reuters’ words – outflows, according to BofA analysts and EPFR data, which found that investors rushed into government bonds and other safer assets.
Yet while investors bailed on stocks, someone else was clearly buying, as seen by the S&P’s weekly performance. How is this possible? Two words – stock buybacks.
So looking at the past week, as investors allocated modest capital to European, Japanese and EM funds (+0.1$BN, +$4.1BN and +$0.8BN respectively), they pulled money out of the US at a frantic pace, redeeming $10.3 billion from U.S. equity funds.
The risk-off mood drove investors to put money into the safest of venues, money market funds, whose assets jumped to $2.9 trillion, the highest level since 2010. Gold also saw inflows of $0.4 billion.
Confirming that retail investors were spooked by trade war fears, U.S. small caps “were sheltered from the storm” and enjoyed a tiny $0.03 billion in inflows, offset by $10.1 billion in large-cap outflows.
That said, Trump’s backing down and exempting of Canada and Mexico from the final tariffs announced late on Thursday eased investors fears, while news the U.S. president would meet with North Korean President Kim Jong Un caused crude prices to rise. “US-DPRK detente suggests protectionism can remain at “bark” not “bite” stage,” argued strategists.
Still, BofA’s Michael Hartnett is less sanguine, pointing out that “as QE ends, protectionism begins.” He adds that the upcoming “war on Inequality” will be fought via Protectionism, Keynesianism, Redistribution, and warns that with “monetary & fiscal policy now spent” it leaves markets to discount Protectionism, even as global tariffs are very low (for now as shown below). This is offset by the US-DPRK détente, which suggests that “protectionism can remain at “bark” not “bite” stage.”
Furthermore, as we noted earlier another latent risk is the imminent end of QE: with just 116 trading days until SPX enters the longest bull market all-time, “bullish QE is peaking as Fed/ECB/BoJ have bought $11tn of financial assets since LEH” while in 2018 the Fed will sell $400bn in assets, the ECB tapers in Sept, and by year-end Fed/ECB/BoJ asset purchases turn -ve YoY.
The approaching end to quantitative easing also caused outflows from rate-sensitive credit markets, driving BAML’s “Bull & Bear” indicator of market sentiment down to 6.8, down from 7.6 in the previous week. The indicator’s 10-point scale ranges from most bearish at zero to most bullish at 10.
It’s not just equities: junk bond outflows are also accelerating, with redemptions for eight straight weeks and $3.1BN redeemed in the latest week, while investment grade inflows continue to lose momentum as IG bonds remain some of the worst YTD performers amid rising rates.
Yet nothing appears able to dent what is going on in the tech sector: while global tech funds did slip last week, losing $0.2 billion, they have drawn in record inflows of $42 billion so far this year, even as the market cap of U.S. tech stocks already dwarfs the combined market cap of emerging markets’ and euro zone equities.
Finally, going back to the growing risk of protectionism, here Hartnett writes that the ideal fund to capitalize on global trade war would be: “long “stagflation”…long cash, commodities, real estate, equity volatility, growth defensive sectors e.g. health care “
There was some good news for long-suffering carbon-based fund managers: the silver lining was that active management continued its comeback, if only for the time being – actively managed funds saw their biggest inflows year-to-date since 2013.
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