Investors pull billions from US stocks in longest outflow streak since 2004
- Investors have pulled $30 billion from U.S. stock funds over the last 10 weeks, Bank of America Merrill Lynch says.
- The latest week of outflows marks the 10th straight week of withdrawals, the longest in more than a decade, and internal positioning changes also indicate investors are becoming more defensive, the report says.
- The outflows occurred despite the S&P 500’s nearly 1 percent gain this quarter and a record high on Aug. 8.
Investors are fleeing U.S. stocks in a way they haven’t since 2004.
For 10 straight weeks a total of $30 billion has left U.S. stocks, marking the longest streak of outflows since 2004, Bank of America Merrill Lynch said in a Thursday report, citing EPFR Global data.
Investors turned instead to emerging markets and European and Japanese stocks, which saw $36 billion in inflows over the last 10 weeks, the report said.
Streaks of consecutive weekly US stock fund outflows
Source: BofA Merrill Lynch Global Investment Strategy, EPFR Global
BofAML’s breakdown of last week’s fund flows pointed to more aversion to risk among investors, and could add to some analysts’ worries about deteriorating market internals.
The 10-week outflow from U.S. stocks comes despite the S&P 500’s nearly 1 percent gain this quarter and a record high on Aug. 8.
The report also pointed out the turn away from U.S. stocks coincided with the late June surge in the euro against the U.S. dollar to its strongest in nearly a year, after comments from European Central Bank President Mario Draghi suggested higher inflation and tighter monetary policy soon in the euro zone.
The euro subsequently climbed to its highest in more than two years in early August, and traded slightly below those levels near $1.186 Friday. Draghi is scheduled to speak later Friday afternoon at an annual meeting of central bankers in Jackson Hole, Wyoming.
In the week ended Wednesday, European stocks saw their first outflows in seven weeks, the BofAML report said, while Japanese stocks saw their largest inflow in five months at $3.1 billion.
Major contributors to U.S. stock market gains in the last several months saw significant outflows in the week ended Wednesday, the BofAML report said:
- Technology — $600 million, largest in 49 weeks.
- Financials — $35 million, second straight week.
- Consumer — $1.5 billion, third largest ever
The defensive utilities sector was the only U.S. stock sector to see slight inflows in the last week.
By investing style, investors withdrew $1.6 billion from U.S. growth stock funds and $1.1 billion from U.S. value stock funds, the BofAML report said. Only U.S. small caps saw inflows, at $700 million.
Investors also piled into Treasury bonds, which saw their greatest inflows in 10 weeks at $900 billion. But riskier high-yield debt posted $2.2 billion in outflows, its eighth week out of 10 of withdrawals, the report said.
That said, analysts don’t expect the defensive turn to result in a large market downturn.
“This is definitely weaker U.S. equity inflows but still net positive and my sense is that positioning is still long and the VIX back at 11 shows there is still complacency,” Ilya Feygin, managing director and senior strategist at WallachBeth Capital, said Friday. He estimated U.S. stock exchange-traded funds, passive investment products which have risen in popularity over mutual funds, gained $6.1 billion in net inflows since June 30.
In addition, BofAML said its proprietary Bull & Bear indicator did not trigger a “sell” signal, meaning the market still remains in a rally mode.
And while overall the bank’s wealthy private clients turned more defensive, their allocation to one traditional safe haven, precious metals ETFs, has fallen to record lows, BofAML said.
Private client allocation to precious metals ETFs as % of assets under management
Source: Bank of America Merrill Lynch, BAC data
Market Warnings Lose Impact –
Stocks Could Run
In investing, a good time to buy is when worries and warnings are abundant. Now appears to be that time for stocks.
Disclosure: Author is fully invested in U.S. growth stocks
The reason for the worries and warnings becoming so loud now is the mounting consternation about the market not behaving as expected. Over a month ago, the belief in a coming downward adjustment seemingly reached critical mass:
MarketWatch (July 21): “Two-thirds of U.S. investors think stocks are overvalued”
“About 36% of investment managers find the U.S. stock market undervalued or fairly valued at current levels, according to a quarterly investment manager survey performed by Northern Trust Asset Management. That’s the lowest reading in the history of the survey, which began in the third quarter of 2008.
“Nearly two-thirds of investors—65%—say the U.S. equity market is overvalued, the highest percentage on record.”
In spite of that strong bearishness, the market has continued to show resilience. Normally, that contrarian reality would sow doubts about the worries and warnings. However, this time it has produced increased frustration, underscored by investor action.
CNBC (August 25): “Investors pull billions from U.S. stocks in longest outflow streak since 2004”
“Investors have pulled $30 billion from U.S. stock funds over the last 10 weeks, Bank of America Merrill Lynch says.
“The latest week of outflows marks the 10th straight week of withdrawals, the longest in more than a decade, and internal positioning changes also indicate investors are becoming more defensive, the report says.
“The outflows occurred despite the S&P 500’s nearly 1 percent gain this quarter and a record high on Aug. 8.”
Beyond reasoning – emotionally charged negativity
Now that the warnings are widespread yet unfulfilled, articles have shifted to scary visions of what could happen.
The 1987 stock market crash is a (the?) popular choice now. Based on a few minor similarities (while ignoring the many major dissimilarities), the Black Monday selloff is highlighted. These articles are grossly misleading because the actual causes of the 1987 run-up and crash had little or nothing in common with today’s market. Additionally, the economy and financial system were dissimilar. Finally, and perhaps most importantly, the broad-based investor optimism before the 1987 crash has been absent from the 2017 stock market. Look at the chart below to see 1987’s optimistic bubble that then popped, and compare it to the mild, controlled rise in 2017.
So, why was the 1987 crash chosen? For two flawed reasons.
First, because 1987 involved a positive trend that turned negative quickly. The nonsensical implication is that because 2017 also has a positive trend, it, too, could turn negative quickly.
Second, because 2017 ends in a “7” just like 1987. This idiotic reason gained a following when Barron’s and others saw fit to write about it. See “Sorry, Barron’s – The 2017 Stock Market Is Not Cursed Because It Ends In ‘7’” for an explanation of the huge flaws in proposing such a theory.
In spite of the silliness in comparing the two years, here are just some of the articles that use the 1987 crash as a vision of what could happen now:
- Bloomberg: “The Market Is Behaving Much Like It Did in the Past”
- TheStreet.com: “The Stock Market May Be Poised for a Replay of the 1987 Crash”
- Fortune: “Top Economist: Get Ready for a Stock Market Drop”
- Markets Insider: “Wall Street is sending huge warning signs for stocks”
- Money Magazine: “Stocks Just Entered a Historically Scary Period. Here’s Why”
- Investing.com: “Investment Legend Warns Of A 1987-Type Market Crash”
- Investors Chronicle: “Black-Monday Model says Sell”
- Business Insider: “Wall Street is at war with itself over the future of stocks”
- Lombardi Letter: “Hindenburg Omen Indicator Signals Major Stock Market Crash in 2017”
- Economic Times: “There’s reason in low-volatility paranoia: Market crashes follow”
- MarketWatch: “Wall Street isn’t ready for a 1100-point tumble in the Dow industrials”
- Financial Times: “The next crash risk is hiding in plain sight”
- Gold Seek: “The End is Nigh”
- U.S. News & World Report: “7 Ways to Profit From a Market Collapse”
- Commodity Trade Mantra: “Is Apparent Strength in Stock Market Masking Deeper Problems Below the Surface?”
- FXStreet: “The 1987 stock market crash revisited: Too many parallels to ignore, forewarned is forearmed”
- MoneyWeek: “Here’s how the S&P 500 could get to 5000”
The bottom line
Beliefs and emotions, when they become widespread and coalesce around a particular view, are an excellent contrarian indicator. Like a pendulum, they reach an extreme point, and then begin to reverse. That reversal – call it a move back to common sense and normality – can produce a strong investment shift.
In today’s market, that means owning stocks is desirable. Not only could that selling mentioned above reverse, it could spur an increase in demand from the conservatively allocated portfolios of both individuals and institutions.
Are you having a hard time believing that all the negativity is wrong-headed? Then, try creating a mental and emotional picture of a true bull market, where you own growth stocks/funds, your holdings have nice gains that are increasing, analysts are discussing positive economy/company developments, investing advice is focused on optimizing capital gains and articles regularly describe how well things are going.
Got it? Now compare that picture to today. Not even close. Therefore, clearly, we are not in an overvalued, optimistic, risk-taking time in which investors are counting their winnings with complacency.