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June 3, 2022

Financial Services Funds Hemorrhage Capital

by Jack Fischer.

The Lipper Financial Services Funds classification suffered $1.0 billion in outflows over the past fund-flows week, putting them second-highest in equity classification weekly outflows. Lipper Financial Services Funds have been bleeding capital since the start of the quarter. Seven of the last nine weeks have reported outflows of more than $1.0 billion, including the record-setting $3.4 billion outflow during the flows week ended April 6.

During the first quarter of 2022, Lipper Financial Services Funds posted an inflow of $3.9 billion as money transitioned from out of growth funds into value and equity income funds. The recent exodus from Lipper Financial Services Funds has sent them to the top spot in quarter-to-date equity classification outflows.

While poor performance across the board can help explain some of the outflows, there are other factors at play here. First, investor caution and risk-off sentiment have been growing in today’s markets. JPMorgan Chase (JPM) CEO Jamie Dimon even said that market participants need to be prepared for an oncoming economic “hurricane” and that investors must “brace” for it. He went on to say that JPM will continue to maintain a conservative balance sheet in anticipation of the turbulent times. Another financial CEO, Charlie Scharf of Wells Fargo (WFC), also voiced fears that the Federal Reserve’s intention for a soft landing will be extremely difficult to accomplish “in the environment, we’re in today.” He went on to say point blank, “It’s going to be hard to avoid some sort of recession.”

Another speedbump for the Lipper Financial Services Funds is the recent relatively dovish tone from the Federal Reserve. In the May minutes, market participants got a clear picture that the Federal Open Market Committee (FOMC) will stay hyper-focused on inflation by more than likely raising rates in June and July by 50 basis points (bps). However, the policy path after that is projected to be more data-driven based on the state of the economy. Recent economic data has pointed to a more resilient economy than many expected. The Department of Labor reported nonfarm payrolls increased by a total of 390,000 in May—65,000 more than forecasts projected. The Department of Commerce showed that the Personal Consumption Expenditures Index (PCE, the Fed’s preferred gauge of inflation) increased just 0.2% in April, down from a 0.9% gain in March, while consumer spending grew 0.9%.

Financial securities tend to benefit, at least in the short term, from an increasing rate environment. With recession rhetoric becoming more prevalent and future interest rate hikes not as certain, this Lipper classification has fallen out of favor.

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