March 27, 2020

Equity Markets Rally, Fund Investors are Unconvinced

by Pat Keon, CFA.

Equity markets experienced a bounce for most of this week’s trading as they took strength from the hope that the $2.2 trillion stimulus package would soon come to the country’s rescue. The stimulus plan has been approved by Senate and was scheduled to be voted on by the House on Friday, March 27.

After retreating 3% in trading on Monday, March 23, the Dow Jones Industrial Average surged 11.4% on Tuesday as there were indicators that the economic stimulus package was close to being finalized. The Dow’s performance represented its largest one-day percentage gain in 87 years. The good feelings continued through the end of trading Thursday as the Dow spiked 21.3% in just three trading days, its largest three-day gain since 1931. The twenty-plus percentage point gain marked the beginning of a new bull market for the Dow, thus ending the bear market in just 11 trading days, the shortest bear in the Dow’s history. Considering the volatility that the markets are sure to encounter as the war against the coronavirus ebbs and flows, the new bull market seems to be destined to be short lived as well.

Fund investors were not as exuberant as the markets. Despite the potential positive impact that the economic relief package could have, fund investors remained on the sidelines, and with good reason. There were huge red flags this week for the U.S. economy including: (1) unemployment claims of 3.3 million, almost five times the previous record high and (2) a recession seems guaranteed at this point, with major sectors of the economy being completely shut down. This second point seemed to be confirmed by Federal Reserve Chairmen Jerome Powell as he stated that he anticipated that economic activity would decline substantially in Q2 despite the unprecedented measures that the Fed has enacted over the last couple of weeks.

It was against this backdrop that net inflows into money market funds surged to their third straight weekly record high. Money market funds are a parking place for assets when investors don’t want to participate in whatever uncertainty or volatility the market is experiencing at that time. During the downturn since the escalation of the coronavirus pandemic, the high-water mark for weekly net positive flows for money markets has grown from $81.2 billion (for the fund-flows week of December 12, 2018) to the $259.8 billion that was taken in this week.

On the opposite end of the spectrum, other fund asset groups are setting records for their worst weekly net outflows ever as investors seek to sit things out. Taxable and tax-exempt bond funds have each experienced record-high net negative flows in back-to-back weeks. Taxable bond funds saw $55.9 billion and $62 billion leave their coffers for the fund-flows weeks of March 18 and March 25, shattering their previous worst weekly net outflow of $15.4 billion, which occurred during the fund-flows week of December 16, 2015. Similarly, muni debt funds saw their net outflows record grow from $12.2 billion to $13.7 billion over the last two weeks, leaving the old record of $4.5 billion (June 26, 2013) far behind.

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