S&P 500 Milestones and the Domestic Equity Fund Quarterly Net Flows That Followed

The S&P 500 Index managed to close above the 2,000 level on August 26, 2014, for the first time, thereby reaching a new milestone much quicker than had been anticipated in the wake of the 2008 financial crisis. Slightly more than five years ago the S&P 500 closed on March 9, 2009, at a financial-crisis low of 676. The index climbed 232% since this low through August 28, 2014, and posted a year-to-date 2014 return of 9.51%.

It bears examining how mutual fund investors reacted following the index’s achievement of psychologically important levels in past cycles to see if investor demand may continue to provide tailwinds to the current domestic equity rally. During the extended bull market for equities in the latter part of the 1990s and into the year 2000, domestic equity mutual fund investors added relatively more to their holdings in the quarters following the dates the S&P 500 crossed levels such as 500, 750, 1,000, and 1,500. In the two quarters following the S&P 500’s surpassing its pre-financial crisis peak of 1,565 on March 28, 2013, domestic equity fund (excluding exchange-traded funds [ETFs]) net inflows were $26.5 billion, while in the two quarters following the S&P 500’s crossing 1,500 the first time on March 22, 2000, net fund inflows were $79.9 billion. The different rate of inflows was no doubt attributable to the rise in use of ETFs but also to a substantial degree of investor skepticism about whether this current rally was sustainable. Net flows into domestic equity mutual funds actually turned negative for second quarter 2014 by $1.3 billion and maintained the negative tone into third quarter 2014 (-$9.8 billion on August 27) as the 2,000 level was being approached.

It bears watching, therefore, to see whether the significant milestone level of 2,000 for the S&P 500 breaks the historical pattern in coming months by not being followed by positive quarterly net mutual fund flows, or whether the equity rally can sustain itself without them or perhaps by being partially aided by net inflows from ETFs.