by Pat Keon, CFA.
The money market funds asset group took in almost $164 billion of net new money for the fund-flows week ended Wednesday, April 1. This total, while substantial, is actually almost $100 billion less than last week’s record-setting net inflow (+$259.8 billion). This result indicates that investors are still more interested in sitting out the current volatility than participating, but after three consecutive weeks of record-setting net inflows for the asset group, it was good to see them step back from the precipice a bit.
The taxable bond funds (-$9.2 billion) and municipal bond funds (-$749 million) groups each experienced net outflows for the fifth consecutive week. These net outflows were significantly less than the record-setting numbers from the week before for the groups (-$62 billion for taxable and -$13.7 billion for tax-exempt). In an investing environment that has changed seemingly overnight and is unrecognizable from what we’ve known in the past, net outflows that do not qualify as the highest in history can be viewed as a positive.
Equity funds broke a streak of six straight weekly net outflows (including -$27.1 billion last week) with $3.9 billion of net positive flows.
The optimism in last week’s markets (driven by the $2 trillion stimulus package) was replaced by America starting to come to terms with the grim reality of what the actual cost of COVID-19 will be in terms of the loss of human life and the halting of the economy. After posting encouraging gains last week (coming on the heels of two consecutive fund-flows trading weeks of double-digit percentage losses), the equity markets started off the week in strong fashion but nosedived during the last two trading sessions to finish the week in the red. Overall, the Dow Jones Industrial Average, NASDAQ Composite Index, and the S&P 500 Index were off 1.21%, 0.32%, and 0.20%, respectively, for the week. This week’s poor performance contributed to the Dow (-23.20%) posting its worst quarterly results since 1987, while the S&P 500 (-20.00%) logged its worst quarter since the global financial crisis.
The tenor of the war against the virus seemed to take a more somber tone this week. Over the weekend, President Trump announced that the federal social distancing guidelines (avoiding non-essential travel and limiting gatherings to no more than 10 people) would be extended at least until April 30. Just a week earlier, the President had floated the idea that these restrictions might be able to be lifted in time for Easter (April 12). Dr. Anthony Fauci, a member of the White House task force on the virus, stated that the extension of these guidelines was necessary because their data indicated that the spread of the coronavirus was not slowing down and was not expected to peak for at least several more weeks. The task force also communicated, in their daily press conference on Tuesday, that their internal models have projected that the death toll in America will be between 100,000 and 240,000, which is a best-case scenario. The aforementioned equity indices each retreated roughly 4.5% in trading the next day in reaction to this sobering news.
The bad news on the economic front was widespread, as could be expected when a country purposely shutters large sectors of its economy. Included among the shocks were record high weekly unemployment claims of 3.3 million in data released on March 26. To put this number in perspective, the previous high was 695,000 almost four decades prior (1982), and during the global financial crisis new weekly unemployment claims peaked at approximately 650,000. The Federal Reserve Bank of St. Louis published a study during the week indicating that they expect jobless claims to go significantly past this initial number by the time the virus (and its impact) has run its course. The study speculates that COVID-19 could put a total of 47 million Americans out of work. If this level is achieved it would equate to an unemployment rate of 32%, surpassing the previous high-water mark for this stat (25%), which was reached during the Great Depression. The unemployment numbers released the morning of Thursday, April 2, seemed to suggest this might be possible as 6.6 million new claims were filed, more than double the record set the previous week.
ETFs took in $5.9 billion of net new money to interrupt a string of five consecutive net outflows. Taxable bond ETFs (+$8.6 billion) were responsible for all of the net inflows with iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, +$4.7 billion) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK, +$1.5 billion) leading the way. Equity ETFs (-$2.6 billion) and muni bond ETFs (-$24 million) both had money leave their coffers this week. The net negative flows for equity ETFs were paced by SPDR S&P 500 ETF (SPY, -$4.8 billion) and Invesco QQQ (QQQ, -$2.4 billion).
Equity Mutual Funds
In a surprising result in this turbulent market, equity mutual funds had net inflows of $6.5 billion to break a streak of 13 consecutive net outflows. Domestic equity funds (+$6.3 billion) accounted for the lion’s share of net inflows while nondomestic equity funds chipped in with $224 million of net new money. Among the peer groups, Large-Cap Core Funds and Large-Cap Growth Funds had positive net flows of $1.8 billion and $1.6 billion on the domestic side, while International Large-Cap Growth Funds turned in the best result (+$752 million) for nondomestic equity funds.
Fixed Income Mutual Funds
This week’s net negative flows for taxable bond funds (-$17.8 billion) and muni bond funds (-$725 million) were a significant improvement from last week when the groups had record-setting net outflows (-$53.9 billion and -$13.1 billion, respectively). The majority of the peer groups on both sides of the ledger (taxable and tax-exempt) suffered net outflows for the week with the worst belonging to Core Bond Funds (-$3.8 billion) and Core Plus Bond Funds (-$3.4 billion) for taxable bonds and General Muni Debt Funds (-$353 million) for munis.
Money Market Mutual Funds
As mentioned earlier, net inflows (+$164 billion) were still strong for this asset group but not quite as extreme as the prior week’s (+$259.8 billion). Just as it was last week, the peer groups that drove the net inflows were Institutional U.S. Treasury Money Market Funds (+$78.6 billion) and Institutional U.S. Government Money Market Funds (+$68.2 billion).