Tuesday, October 29, 2019
$100 billion of outflows
The S&P 500 hit a record high on Monday.
With a close at 3,039.42 to start the week, the benchmark index made its first record close since July 26 as stocks continue their year-long bounce-back after the market's worst year since the crisis in 2018.
And while calling the entire post-crisis bull market the "most hated rally in history" has become a truism in the investing world, investors absolutely hate 2019's rally.
"U.S. equity funds have experienced $100 billion of outflows year-to-date," said David Kostin and the equity strategy team at Goldman Sachs in a note to clients published Friday. "At the current pace, outflows from equity funds this year will be the second largest in 15 years."
A quick look in the rearview mirror and it's not hard to see why: investors got burned hard in 2018.
At the beginning of the fourth quarter of 2018, Goldman's data suggests that allocations to the stock market were in the 95th percentile relative to average allocations over the last 30 years. Said another way, at the end of September 2018, investors were about as enthusiastic about stocks as they’d been in 30 years.
And though investors had taken a few hits along the way — the 1,000-point declines in February 2018 that followed the implosion of short volatility strategies stand out — the post-election rally was largely intact as the fourth quarter of 2018 commenced.
The S&P 500 was up 32% from the 2016 election. The market was just over two weeks removed from record highs. Corporations were still enjoying the benefits of tax cuts. And few were warning about the risks of a global recession.
And then on October 3, 2018, Powell said the Fed was a "long way from neutral," implying that even after having raised rates three times in 2018, many more hikes were in store. This poor choice of words from Federal Reserve Chair Jerome Powell sent the stock market careening into its worst fourth quarter and worst overall year since 2008. After a December 2018 interest rate hike and the market's ultimate low reached on Christmas Eve, investors witnessed a policy backtracking from the Fed that continues today.
Just when investors started to believe in the market again, they got burned. And so while investors have spent all of this year bailing out of stocks, inflows to bonds and cash have been sizable. Over $430 billion has moved into cash so far this year while bonds have seen $353 billion worth of inflows over that period.
And over the last 12 months, the picture is even worse for equity outflows and inflows to safe havens — $592 billion has gone into cash, $259 billion into bonds, and $173 billion out of stocks over the last year. Kostin notes that this is the widest gap between equity fund flows relative to cash and bonds during a 12-month window since 2008.
With just two months left in the decade, the stock market and the economy appear set to enter a new decade with post-crisis bull runs and expansions intact. In Kostin's view, however, this won't be enough to see investors get more enthused about buying stocks in the year ahead.
"Positive equity market returns, rising interest rates, and stabilizing U.S. and World GDP growth should support already-elevated equity exposures," Kostin writes. "However, high uncertainty, investor fears of a recession, and low starting cash allocations will likely limit a significant increase in equity allocations."
What to watch today
10 a.m. ET: Pending Home Sales month-on-month, September (1.0% expected, 1.6% in August)
10 a.m. ET: Conference Board Consumer Confidence, October (127.9 expected, 125.1 in September)
6:45 a.m. ET: Pfizer (PFE) is expected to report adjusted earnings of 62 cents per share on $12.21 billion in revenue
7 a.m. ET: ConocoPhillips (COP) is expected to report adjusted earnings of 71 cents per share on $7.92 billion in revenue
8 a.m. ET: General Motors (GM) is expected to report adjusted earnings of $1.29 per share on $35.73 billion in revenue
8 a.m. ET: Kellogg (K) is expected to report adjusted earnings of 91 cents per share on $3.35 billion in revenue
4 p.m. ET: Amgen (AMGN) is expected to report adjusted earnings of $3.53 per share on $5.61 billion in revenue
4 p.m. ET: Electronic Arts (EA) is expected to report adjusted earnings of 85 cents per share on $1.25 billion in revenue
4:20 p.m. ET: Advanced Micro Devices (AMD) is expected to report adjusted earnings of 18 cents per share on $1.81 billion in revenue
Google parent Alphabet earnings miss, shares fall [Yahoo Finance]
Beyond Meat earnings beat expectations, boosts guidance [Yahoo Finance]