What are investors doing with their money? A sentiment poll is one thing, but we can also gauge sentiment by watching where the assets are moving. The data show that investors are very skeptical of equities here, evident by the record 32 straight weeks of outflows from domestic equity mutual funds according to the Investment Company Institute. The previous record was 25 straight weeks ending in late 2010, when many investors were still looking for a double-dip recession. Where is all this money going? Much of it is moving into bonds, as 31 of the previous 32 weeks have seen inflows into bond mutual funds.
What about adding exchange-traded funds (ETFs) to the picture? It is no secret that many of the outflows from equity mutual funds have moved into equity ETFs. As shown in Figure 3, so far this year the combined outflows from domestic mutual funds and ETFs are $89.1 billion, with only March and July showing small inflows. Now compare that to the combined bond inflows into mutual funds and ETFs of $199.9 billion, with every month positive so far in 2016. Equities aren’t the crowded trade; in fact, it could be bonds.
Conclusion
As we laid out in our Midyear Outlook 2016, we expected market volatility to pick up in the second half of the year but for stocks to still finish with mid-single-digit gains.* Although there are many well-known concerns that could lead to equity weakness, generally positive technical indicators and an overriding sense of worry among investors can be a powerful combination. We would expect any near-term market declines to potentially be shallow and short lived, and would likely view them as potential buying opportunities. Should the myriad of investors’ worries not unfold and the economy pick up some steam, the strong technical backdrop could potentially indicate more stock market gains lie ahead.
Burt White is chief investment officer for LPL Financial.