by Patrick Keon.
Lipper’s fund asset groups (including both mutual funds and ETFs) saw almost $43.0 billion net leave their coffers for the fund-flows trading week ended Wednesday, December 19. This represents the second worst net outflow for the year, trailing only the $51.6 billion net negative flow for the week ended Wednesday, June 20. Equity funds (-$34.6 billion) and taxable bonds funds (-$10.4 billion) accounted for all of the net outflows while money market funds (+$1.7 billion) and municipal bond funds (+$255 million) took in net new money.
The Federal Reserve and global growth concerns weighed heavily on the markets this week. The markets spiraled downward as the S&P 500 Index and the Dow Jones Industrial Average shed 5.44% and 4.91%, respectively, for the week. Weak economic data out of China and Europe brought the idea of a global growth slowdown to the fore, but the major story impacting the markets this week was the Federal Reserve.
The Fed raised interest rates for the fourth time this year as it announced another 25-basis-point increase at its meeting on Wednesday, December 19. This increase was anticipated but it was the lead-up to the announcement, as well as Fed Chairman Jerome Powell’s comments afterward, which shook the markets. In what has been unprecedented behavior, President Donald Trump continued to lobby the Fed to leave interest rates unchanged. In the two days preceding Wednesday’s announcement, Trump took to Twitter to try to jawbone the Fed into not raising rates. Not only was this not successful in getting the Fed to not raise rates, but there was some speculation that it was responsible for the Fed’s more hawkish comments during the post-meeting press conference.
The market reacted negatively to Powell stating that the Fed is not considering altering its quantitative tightening policy. Despite the Fed lowering its forecast of interest rate hikes from three to two in 2019, the Fed announcing that it would not move off its $50 billion monthly balance sheet reduction plans sent both the S&P 500 and Dow Jones down approximately 1.5% for the day.
ETFs had positive net inflows (+$9.4 billion) for the ninth consecutive week. The lion’s share of the net inflows were attributable to equity ETFs (+$6.4 billion) and taxable bond ETFs (+$2.5 billion), while municipal bond ETFs contributed $526 million to the total. The largest net inflows among individual ETFs belonged to SPDR S&P 500 ETF (SPY, +$3.6 billion) and iShares 1-3 Year Treasury Bond ETF (SHY, +$1.4 billion).
Equity Mutual Funds
Equity mutual funds suffered net outflows (-$41.0 billion) for a twenty-sixth consecutive week. Both domestic equity funds (-$30.4 billion) and nondomestic equity funds (-$10.6 billion) saw money leave their coffers this week. While some of these net outflows are attributable to the recent market volatility, we still see indicators (similar to last week) that a significant part of these net outflows are due to funds going ex-dividend on December 19. When a fund goes ex-dividend, the fund’s net assets will fall by the amount of the distribution that day. The assets will then revert back the next day as they are reinvested into the funds. Therefore, we would expect to see net inflows back into these funds on December 20 representing the reinvestment of the distributions.
Fixed Income Mutual Funds
Both the taxable bond (-$12.8 billion) and muni debt (-$271 million) mutual fund groups suffered net outflows for the week. Loan Participation Funds (-$3.0 billion) and Multi-Sector Income Funds (-$1.4 billion) paced the net inflows on the taxable bond fund side of the ledger, while Intermediate Muni Debt Funds (-$397 million) had the largest net outflows for the tax-exempt peer groups.
Money Market Mutual Funds
Money market funds took in $1.7 billion in net new money last week. The U.S. Government Money Market Funds (+$7.4 billion) and Money Market Instrument Funds (+$4.2 billion) drove the net inflows, while Institutional Money Market Funds had net outflows of $6.1 billion.