October 14, 2021

U.S. Weekly FundFlows Insight Report: Persistent Inflation and Poor Employment Data Push Investors Out of Short-Term Funds

by Jack Fischer.

During Refinitiv Lipper’s fund-flows week ended October 13, 2021, investors were overall net sellers of fund assets (including both conventional funds and ETFs) for the second straight week, withdrawing $1.7 billion.

Money market funds (-$5.6 billion) suffered significant outflows for the second week in a row, while equity funds (+$1.7 billion), taxable bond funds (+$1.7 billion), and tax-exempt bond funds (+$461 million) all attracted new money during the fund-flows week.

Index Performance

At the close of Refinitiv Lipper’s fund-flows week, U.S. broad-based indices reported mostly positive results—the Russell 2000 (+1.22%) and NASDAQ (+0.48%) led the charge while putting an end to their five-week streak of negative performance. The S&P 500 (+0.01%) and DJIA (-0.11%) traded relatively flat. Overseas, the broad market indices realized a strong week—FTSE 100 (+2.58%), DAX 30 (+2.13%), and Nikkei 225 (+0.30%).

Rates/Yields

During the fund-flows week, the Treasury yield curve continued to flatten. The two- and three-year Treasury yields are up 24.32% and 23.51%, respectively. The 10-year Treasury yield rose 1.64% while the 30-year yield fell 1.73%. Since the end of Q1 2021, the 10-two Treasury yield spread has fallen 25.54%, two-year yield is up 130.00%, and the 30-year yield is down 15.77%. As of October 7, the U.S. 30-year fixed-rate mortgage average fell to 2.99% (-0.66% week over week). Last week the 30-year fixed-rate mortgage reported the largest week-over-week increase since February. Both the United States Dollar Index (DXY, -0.20%) and the VIX (-14.01%) decreased from last Thursday.

Market Recap

On Thursday, October 7, U.S. national debt ceiling drama took center stage for the public markets. Throughout the prior week, tensions were building regarding whether Congress would raise the limit. The uncertainty drove markets into the red until Senate Republican leader Mitch McConnell finally proposed a short-term debt limit extension. Raising the debt limit by $480 billion not only helped avoid a potentially disastrous government default but also helped U.S. broad-based equity markets revert the daily session to the black—Russell 2000 (+1.59%), NASDAQ (+1.05%), DJIA (+0.98%), and S&P 500 (+0.83%). Also adding to market optimism was the U.S. Department of Labor’s (DOL) report on the initial jobless claims. The total claims fell 326,000 over the previous week and were down 38,000 from the week before—the reported initial jobless claims total was the lowest since early September and the second-fewest during the pandemic era.

Friday, October 8, was a massive disappointment to all market participants who have been following employment data. The DOL published its nonfarm payrolls report that showed the U.S. added just 194,000 jobs in September (versus an expected 500,000). The U.S. added 850,000 and 943,000 jobs in June and July, respectively, while August reported 235,000 new jobs. The market’s interpretation of the DOL’s September nonfarm payrolls report was either going to be an indication that August was a fluke or that there are larger, more widespread employment issues in our economy. With two straight months of weak job growth, investors turned their eyes to the Federal Reserve to see if their hawkish tone of the end-of-year taper talks will continue. For the second straight day, there was a sell-off in Treasury yields as the 10-year yield rose 2.16% to 1.61%—its highest mark since early June. Equity markets finished down on the day with the Russell 2000 (-0.76%) and NASDAQ (-0.51%) giving back a portion of Thursday’s gains. Refinitiv Proprietary Research reported of the 21 companies in the S&P 500 that have reported earnings in the third quarter, 76.2% have reported earnings above analyst estimates.

To start the new calendar week on Monday, investors continued to mull over future Fed reactions to September’s poor job report and how it complicates the Fed’s plan for the end of year tapering. The complications arise because our current environment of poor job growth is now being met with supply chain disruptions and drastic increases in commodity prices—oil prices topped $82 per barrel for the first time since 2014. As we enter a new earnings season, how increased input prices affect revenues will be the primary factor many investors will look at in their evaluations. Stagflation—an environment in which economic growth stalls while inflation remains high—is a serious concern for all market participants. The VIX (+7.03%) rose as equity markets took a dive—DJIA (-0.72%), S&P 500 (-0.69%), NASDAQ (-0.64%), and Russell 2000 (-0.56%).

Tuesday, October 12, saw the small-cap-focused Russell 2000 (+0.61%) outperform the rest of the U.S. broad-based equity indices—DJIA (-0.34%), S&P 500 (-0.24%), and NASDAQ (-0.14%). Shorter-dated Treasury yields rose while the 10- and 30-year yields fell 1.56% and 2.55%, respectively. The DOL’s Job Openings and Labor Turnover Survey (JOLTS) reported 10.4 million positions were available in August, which was a decrease of 659,000 from July, marking the first monthly decline this year.

Our fund-flows week wrapped up Wednesday, October 13, with the DOL publishing the Consumer Price Index (CPI) for September. Core CPI (excluding food and energy) rose by 4.0% over the past 12 months (down from June’s 30-year high of 4.5%). The latest Federal Open Market Committee (FOMC) minutes confirmed the Fed could start reducing its asset purchases at some point between mid-November and mid-December. The 30-year Treasury yield fell for the second straight day by more than 2.50%—the first time since early July. Equity markets ended a three-day skid led by the NASDAQ (+0.73%).

Exchange-Traded Equity Funds

Exchange-traded equity funds recorded $4.5 billion in weekly net inflows. This is the macro group’s second straight week of inflows of more than $4 billion. Equity ETFs snapped five weeks of negative performance after posting a positive 0.84% on average. Despite back-to-back weeks of inflows, the four-week moving average of net flows hit negative for the first time since last October.

Growth/value large-cap ETFs (+$2.4 billion) and sector-financial/banking ETFs (+$1.2 billion) attracted the largest weekly net inflows in the equity ETF macro-group. After consecutive weeks of positive performance (+0.09% and +0.18%), growth/value large-cap ETFs recorded their second straight week of net inflows. With a forecasted jump in yields and the start of a new earnings season, sector-financial/banking ETFs have recorded inflows three weeks in a row. The subgroup has posted positive performance in two of the three past weeks.

Sector-other ETFs (-$673 million), growth/value small-cap ETFs (-$474 million) and sector-technology ETFs (-$240 million) registered the largest outflows for the week. Sector-other ETFs have suffered weekly outflows in four straight weeks despite posting their largest weekly performance (+1.44%) in 26 weeks. Growth/value small-cap ETFs logged their first weekly outflow in three weeks. Sector-technology ETFs have witnessed three weekly outflows in the past four weeks.

Over the past fund-flows week, the top three equity ETFs flow attractors were: Invesco QQQ Trust 1 (QQQ, +$1.6 billion), Select Sector: Financials SPDR (XLF, +$777 million), and SPDR Dow Jones Indus Average (DIA, +$481 million).

Meanwhile, the bottom three equity ETFs in terms of weekly outflows were: SPDR S&P 500 ETF (SPY, -$1.1 billion), iShares: Russell 2000 ETF (IWM, -$890 million), and Direxion Daily Financial Bull 3X Shares (FAS, -$402 million).

Exchange-Traded Fixed Income Funds

Exchange-traded fixed income funds recorded $1.0 billion in weekly net inflows—the macro-group’s eleventh week of inflows over the last 12. Fixed income ETFs reported a weekly return of negative 0.01% on average.

Government-Treasury ETFs (+$2.2 billion) and government-mortgage ETFs (+$442 million) had the largest weekly inflows under the fixed income ETF macro-group. Government-Treasury ETFs realized their fifth week of net inflows in the last six. Government-mortgage ETFs posted their fourth straight week of net inflows. The subgroups realized weekly performance of positive 0.13% and negative 0.17%, respectively.

Corporate-high yield ETFs (-$1.4 billion) and International & Global Debt ETFs (-$573 million) were the only subgroups to record weekly outflows of more than $20 million. Corporate-high yield ETFs have now observed back-to-back weekly outflows. International & Global Debt ETFs suffered their fourth straight week of outflows and their largest outflows since March. Both subgroups reported negative performance (-0.17% and -0.14%, respectively).

iShares: 20+ Treasury Bond ETF (TLT, +$683 million) and Schwab US TIPS ETF (SCHP, +$427 million) attracted the largest amounts of weekly net new money for taxable fixed income ETFs.

On the other hand, SPDR Bloomberg Barclays High Yield Bond (JNK, -$780 million) and iShares: JPM USD Emerging Markets Bond (EMB, -$589 million) suffered the largest net weekly outflows.

Conventional Equity Funds

Conventional equity funds (ex-ETFs) were net redeemers for the fifteenth time in 16 weeks (-$2.9 billion). Conventional equity funds posted a weekly return of positive 0.81% on average.

Domestic conventional equity funds saw outflows this week (-$2.8 billion), marking the sixteenth straight week of outflows. The subgroup has realized two straight weeks of positive performance (+0.07% and 0.57%). Nondomestic conventional equity funds also reported a weekly outflow (-$115 million), marking their second week of outflows in three.

Sector-real estate funds (+$96 million) and sector-other funds (+$86 million) were the only subgroups to witness weekly inflows of more than $30 million under this macro-group. Sector-real estate funds snapped a two-week skid of outflows as they returned a positive 1.88%. Sector-other funds posted their first weekly inflows in four after appreciating 1.36%, on average, over the week.

Growth/value large-cap funds (-$2.0 billion) and equity income funds (-$362 million) saw the most money leave under conventional equity funds. Growth/value large-cap funds have seen outflows in 67 of their last 68 weeks. The subgroup recorded a positive 0.44%, on average, over the fund-flows week. Equity income funds logged their fourth straight week of net outflows.

Conventional Fixed Income Funds

Conventional fixed income funds realized a weekly inflow of $711 million—their ninth week of inflows in 10. The subgroup reported a weekly performance of positive 0.02% on average.

Conventional flexible funds (+$717 million) and corporate-investment grade funds (+$599 million) led the macro-group in inflows. Conventional flexible funds recorded their twenty-sixth straight week of inflows. Corporate-investment grade funds observed their seventy-seventh week of inflows in 78.

Corporate-high yield (-$431 million) and corporate-high quality (-$302 million) suffered the largest outflows under conventional fixed income funds. Corporate-high yield funds have witnessed three consecutive weeks of outflows, each of which logged negative weekly performance. Corporate-high quality funds posted a negative 0.04 over the week as they notched their third straight week of outflows.

Municipal bond funds (ex-ETFs) returned negative 0.14% on average over the fund-flows week. The subgroup attracted inflows ($+329 million) and posted their twenty-seventh week of inflows in 28. The subgroup has reported negative weekly performance in five of the past six weeks. Conventional municipal bond funds have only recorded three total weeks of net outflows this year.

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