Fund Investors Getting Wary With S&P 500 at Record’s Doorstep
Investors withdrew $42 billion from equity-focused exchange-traded and mutual funds last month.
(Bloomberg) -- Usually the sight of a major stock index nearing an all-time high is an encouragement to bulls, pulling in money as markets start to dominate dinner-table chatter. No such celebration is happening now, going by measures of fund flows.
Investors withdrew $42 billion from equity-focused exchange-traded and mutual funds last month, according to estimates from the Investment Company Institute. Bloomberg data show another $3.7 billion left ETFs over the past week. The monthly outflow, coinciding with the S&P 500’s best July in a decade, was the largest since the 2008 global financial crisis.
While those figures don’t capture everything, including the preferences of stock jocks day trading with commission-free brokerage apps, the aversion marks a switch from early stages of the rally. Given all the things that have changed since the S&P 500 last touched a record, the prudence may be warranted.
Corporate earnings, while beating estimates at a record pace, are still heading for a 33% plunge for the current reporting season. With the contraction expected to persist for the rest of 2020, stocks are more expensive than any time since the dot-com era. While angst about the Covid-19 pandemic is arguably easing, doubts are mounting over economic stimulus and a clean outcome in the presidential race.
“That confluence of things makes it a little scarier for folks who don’t have a five-to-10-year time horizon,” said Wayne Wicker, chief investment officer of Vantagepoint Investment Advisers. “Risk aversion is coming back into the markets.”
The S&P 500 climbed 2.5% over five days, closing the week about 1% away from its all-time high reached in February. The Dow Jones Industrial Average rallied 3.8%, snapping two weeks of losses, and the Nasdaq 100 advanced 2.1%. Thanks to robust returns from internet and software companies, the tech-heavy gauge took out its February peak two months ago and has since scored a dozen more record highs, including four this week.
After sinking into the fastest bear market ever, the S&P 500 is close to erasing all its losses in a recovery that has lifted it almost 50% from the March bottom. Other than its headline price, however, few similarities exist between now and six months ago.
A prolonged and steady economic expansion has given way to the worst recession on record, courtesy of the Covid-19 outbreak. What was expected in February to be to a year of record profits is now likely to see one of the worst drops ever, with analysts slashing their 2020 estimates to $130 a share from $174.
To fight the economic fallout of the pandemic, the Federal Reserve has pulled out all the stops and lawmakers are now negotiating a new coronavirus relief bill. Partly bolstered by the policy support, stocks have kept climbing despite worsening earnings expectations. The end result: Elevated valuations. Trading at 26 times forecast earnings, the S&P 500’s multiple sits six points above where it was in February.
To be sure, the pace of deterioration has slowed. Indicators tracking the pandemic outbreak, from infection cases to hospitalization rates and deaths, are showing an improving trend.
But macro concerns persist. For the first time during the pandemic, the U.S. election was picked as the biggest market risk, replacing a second wave of virus outbreak, according to a survey of investors and corporations from Evercore ISI conducted earlier this month.
“We’re coming into an election period where there’s a tremendous amount of uncertainty not just with the presidential race but with Senate seats up for grabs,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “There could be some significant changes that come out of this election. And investors are aware of that and are a little bit cautious.”
Equity ETFs and mutual funds saw withdrawals for a seventh straight week through July 29, data compiled by Investment Company Institute show. While February also experienced redemptions, the pace was slower than July’s.
To Nicholas Colas, co-founder of DataTrek Research, the distaste bodes well for the market because it means potentially unspent buying power.
“July’s outflows are very bullish for U.S. equities,” Colas wrote in a note to clients. “The only time to worry about stocks is when U.S. equity fund flows turn positive, as this is a very good contrarian indicator.”
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