Exodus from bond funds is mitigating stock market tremors

According to Refinitiv Lipper, investors pulled in about $160 billion from money-market funds and $17.5 billion from bond mutual funds and exchange-traded funds. The migration is already on pace to be the largest in at least seven years.

About $50 billion was funneled into stock funds over that period, including about $21 billion so far this month.

Amidst the changing economic and monetary landscape, there is a huge reshuffling of assets. Concerns about rising inflation and the Federal Reserve’s plan to raise interest rates as soon as next month have put the bond and stock markets under pressure to start the year.

The yield on the 10-year Treasury note eclipsed 2% earlier this month for the first time since mid-2019, and the S&P 500 is down 8.8% in 2022, including last week’s 1.6% drop.

Investors typically use money-market funds as a relatively safe place to park cash. Now that inflation is back, their purchasing power is gone.

“People don’t have a lot of options,” said Jonathan Waite, a senior investment analyst at Frost Investment Advisors. He added a well-worn four-letter abbreviation at a recent team meeting on macroeconomic backgrounds . : “Tina. There is no option for stock”.

In other words, even as the stock market is struggling to gain momentum, investors have few other attractive options for working their cash, he and other analysts said.

This week, investors will look at a new batch of economic data, including measures of consumer confidence, new home sales and personal-consumption spending, to assess the market’s trajectory. Markets are closed on Mondays on the occasion of President’s Day.

To be sure, investor sentiment has deteriorated in recent weeks. According to the latest survey by the American Association of Individual Investors, the share of individuals expecting US stocks to rise over the next six months fell to nearly 19%, its lowest level since 2016.

Analysts warn that as long as investors remain uncertain about the course of geopolitical events in Ukraine and the outlook for monetary policy, the volatility will continue. That’s why last week Goldman Sachs lowered its outlook for the S&P 500, lowering its year-end forecast from 5100 to 4900. The new target represents a 12% gain from current levels.

So far, some investors have shown willingness to buy the downside in the stock market, which has softened the pullback. So far this year, nearly $18 billion has been invested in the Vanguard S&P 500 ETF in a similar fund run by BlackRock’s iShares unit, according to data from FactSet.

Furthermore, investors appear more sensible. They tend to favor relatively cheap-priced stocks and dividend-payers compared to the expensive stocks of fast-growing companies. Value stocks are those that trade at low multiples of their book value or net worth, while growth stocks command huge multiples based on their potential for large profits in the future.

According to Refinitiv Lipper, large-cap value funds have pulled in $5.2 billion over the past seven weeks, more than half the amount they raised last year, while those focused on dividend strategies have added $13.2 billion. Meanwhile, large-cap growth funds have lost $18 billion.

David Groman, a global equity strategist at Citi, says he anticipates investors will continue to favor stocks, especially those that fit the traditional definition of value, as long as the valuation gap between growth and value is as close as possible. It remains huge. Their latest analysis showed that the price-to-earnings ratio of value stocks has increased by up to 40%.

“The gap is so, so wide,” said Mr. Groman. “We can just scratch the surface of one rotation in value.”

Calls for a resurgence in value investing are hardly new after more than a decade of dominance by growth stocks. Any outperformance from traditional value sectors such as banks, energy firms and manufacturers has been short-lived.

Julian Kosky, chief investment officer at asset-management firm New Age Alpha, believes the latest return of value is set for a similar fate.

He said he takes a bearish stance on value stocks because valuations of banks and other relatively cheap stocks are already peaking and solid earnings growth would be needed to justify the higher multiples. At the same time, valuations of growth stocks continue to decline and will eventually be difficult to pass, especially if the economy weakens under the weight of higher rates and inflation, he said.

In fact, according to FactSet, banks’ forward-looking P/E ratio in the S&P 500 has risen to nearly 14 this year, well above the sector’s five-year average of 13.3. The communications-services stock is up 18.8 times the benchmark, roughly the same level those companies traded at the end of 2019. The latter region is home to the parent companies of Facebook and Google, such as The Walt Disney Company and AT&T Inc.

“When earnings season comes and the number of value stocks is going to be hit hard,” Mr. Kosky said, adding that a decline in growth stocks “will make it easier for companies to deliver the growth inherent in their prices.” ” ,

Earnings forecasts support this possibility. Financial companies in the S&P 500 are expected to see earnings decline 11% in 2022, while communications-services companies’ profits are projected to grow 2.6%.

Regardless of how investors split their dollars among stocks, many analysts said the bond market is in for a rough ride that could halt its multi-decade bull run. The recent outflow is a complete reversal from recent years. In each of the past three years, investors added hundreds of billions of dollars to bond funds, with inflows reaching a peak of $457.6 billion in 2021.

Now, analysts at Deutsche Bank compare the environment to 2013, when a large increase in rates around a taper tantrum caused more than $300 billion in inflows to stock funds over the next 12 months and outflows to bond funds. .

“Far from being an anomaly, this rotation is in line with historical patterns,” said analysts at Deutsche Bank.