As the market sails to new highs, the floodgates have broken open.
Money is pouring like crazy into stocks, which is of course classic investor psychology. Nobody buys low. People like to buy high.
In Goldman Sachs' latest "Weekly Kickstart" note, strategist David Kostin relays the discussion the firm is having with clients. The discussions are all about retail fund flows, and the rush of money into stocks.
The 5% S&P 500 pullback in June did not derail strong flows into equities although the recent focus on Fed policy and potential for QE tapering has overshadowed an important shift in flows that appears to favor retail sponsorship of equities. Retail equity sponsorship is inflecting higher. This week the Goldman Sachs Rotation Index reached its highest point since late 2008, indicating that retail mutual fund flows have a higher risk appetite and bias towards equity funds.
The drivers of that shift have been $50 bn of outflows from taxable bond mutual funds and ETFs and $30 bn of flows into domestic equity funds since the start of June. During 2Q $28 bn of assets flowed into domestic equity funds vs. $27 bn into taxable bond funds. Those flows reflect strong relative outperformance of stocks versus bonds as the 10-year US Treasury bond posted its third straight quarter of negative total returns in 2Q. The Treasury has lagged the S&P 500 by 20% in 2013, and through June the S&P 500 information ratio is on pace for a 78th percentile performance since 1962.
Retail equity allocation is now overweight vs. its 20-year average of 68.4%. The mix of retail flows continues to rebalance the mutual fund asset allocation. We estimate retail investors have 69% of assets in equity funds, which is 70 bp above average since 1992 and up from 65% in 2012. Within that equity allocation a structural shift in favor of international funds is clear while bond holdings show an overweight in investment grade corporate vs. underweight in municipal bond funds.
This chart from the note is Goldman's own "Rotation Index" which looks at relative stock-vs-fixed income fund flows. As you can see, the rotation into stocks is surging like mad in recent weeks.
Meanwhile, the topic of retail money rushing into equity ETFs was also on the mind of Mike O'Rourke of JonesTrading, who wrote about this in his "Closing Print" note, which was sent out last night.
O'Rourke did some number crunching to see which sector ETFs were garnering the most interest from investors:
There are some trends that we thought were interesting, such as the XLF. Although the Financials are only up 26% year to date, the ETF market cap is up by 85%. Of all sector ETF’s, Financials has the largest market cap, which is 50% greater than Technology’s XLK. It is likely many investors opt for their technology exposure in the lager QQQ. Despite the uninspiring performance of Tech, the market cap of the XLK has grown nearly 40% this year.
The XLY has seen its market cap grow 77% since the start of the year versus 25% gain for the Consumer Discretionary Sector. Similarly, the XLI has experienced 50% market cap growth versus the 20% year to date gain for the Industrial sector. The IWM has experienced strong flow activity with the market cap being up 65% year to date versus the 25% gain for the Russell 2000. Likewise the SPY has experienced a 28% growth in market cap versus 18% performance for the S&P 500. While it is hard to know how much flows of this size influence the broad market, the one thing this clear is there are investors making a big exposure grab. The activity is more about buying the market and sectors and less about individual stocks.
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