by Pat Keon, CFA.
Lipper’s fund asset groups (including both mutual funds and ETFs) experienced net outflows of $23.7 billion for the fund-flows trading week ended Wednesday, January 30. Equity funds (-$13.6 billion) and money market funds (-$12.8 billion) accounted for all the net negative flows, while taxable bond funds and municipal debt funds had net inflows of $1.6 billion and $1.1 billion, respectively.
The Federal Reserve took its foot off the proverbial brakes at its January meeting (which concluded on Wednesday, January 30) and the equity markets breathed a sigh of relief. Not only did the Fed leave interest rates unchanged (the federal funds rate currently has a target range of 2.25% to 2.50%), but the Fed also backed off the somewhat hawkish stance it took at its December meeting. After this month’s meeting, Fed Chairman Jerome Powell stated the case for raising rates had “weakened” and he “would want to see a need for further rate increases” before initiating any. He referenced a spike in inflation as something that could cause the Fed to consider raising rates again, but inflation has been trending downward and is expected to sink even lower in the coming months as the impact of lower energy prices is felt. The Fed also softened its stance on the reduction of its balance sheet. In December, Powell stated the bond selloff was on “autopilot,” but changed that statement to the Fed was prepared to adjust the shedding of these assets based on the current economic and financial situation after the current meeting. Powell confirmed this would most likely mean the Fed would stop reducing its balance sheet sooner, and with more assets remaining than it originally planned. The markets reacted enthusiastically to this news, as the NASDAQ Composite Index, Dow Jones Industrial Average, and S&P 500 Index appreciated 2.20%, 1.77%, and 1.55%, respectively, on the day of the Fed’s announcements. These one-day results represented the lion’s share of the weekly gains for each of the indices.
ETFs experienced net outflows of $14.7 billion, emanating mostly from equity ETFs (-$14.6 billion). The net outflows from equity ETFs were heavily concentrated with three individual ETFs accounting for more than $11.0 billion in net negative flows: iShares Core S&P 500 ETF (IVV, -$7.3 billion), Invesco QQQ Trust 1 (QQQ, -$2.1 billion), and SPDR S&P 500 ETF (SPY, -$1.8 billion). Municipal bond ETFs (-$239 million) also suffered net outflows, while taxable bond ETFs took in $135 million in net new money.
Equity Mutual Funds
Equity mutual funds had net positive flows (+$1.0 billion) for the fourth straight week after suffering through 28 straight weeks of net outflows. Both nondomestic equity mutual funds (+$659 million) and domestic equity mutual funds (+$374 million) contributed to the net inflows. A more granular look reveals that the Large-Cap Growth Funds (+$361 million) and Emerging Markets Funds (+$336 million) classifications had the largest net inflows for the domestic and nondomestic groups.
Fixed Income Mutual Funds
Both the taxable bond (+$1.4 billion) and muni debt (+$1.3 billion) mutual fund groups experienced positive net flows for the week. For taxable bond funds, the Ultra Short Obligation Funds (+$513 million) had the largest net inflow, while on the muni bond fund side of the ledger the General Muni Debt (+$350 million) and High Yield Muni Debt Funds (+$322 million) took in the most net new money.
Money Market Mutual Funds
Money market funds saw $12.8 billion leave their coffers, paced by the Institutional U.S. Treasury Money Market Funds (-$9.1 billion) and Institutional U.S. Government Funds Money Market Funds (-$2.0 billion) peer groups. Conversely, Money Market Instrument Funds had net positive flows of $3.0 billion.