Investors were net sellers of fund assets (including those of conventional funds and ETFs) for the second consecutive week, withdrawing a net $11.5 billion for the Refinitiv Lipper fund-flows week ended Wednesday, February 8. However, the headline numbers are a bit misleading. Fund investors were net purchasers of taxable bond funds (+$3.8 billion), tax-exempt fixed income funds (+$775 million), and equity funds (+$111 million), while being net redeemers of money market funds (-$16.2 billion) for the week.
Market Wrap-Up
Despite an improving inflationary picture—dovish comments by Federal Reserve Board Chair Jerome Powell after the Fed’s policy-setting meeting last week and good Q4 corporate earnings season so far—a much better-than-expected nonfarm payrolls report injected a lot of volatility into the U.S. markets, leading to mixed returns in both equities and fixed income securities for the fund-flows week.
On the domestic side, after investors began to pick up out-of-favor growth and tech stocks during the week in anticipation that the Fed might be nearing its target terminal rate, the Nasdaq Composite (+0.70%) posted the only plus-side returns of the broad-based U.S. indices, followed by the S&P 500 (-0.03%). The Russell 2000 (-0.92%) was the relative laggard of the group. Overseas, the Xetra DAX Total Return Index (-0.31%) did the best job of mitigating losses of the often-followed broad-based international indices, while the Shanghai Composite (-2.16%) and the Nikkei 225 (-0.74%) were the group laggards.
For the fund-flows week, the Morningstar LSTA U.S. Leveraged Loan Index (+0.59%) outpaced the Bloomberg Municipal Bond Index (-0.30%) and the Bloomberg U.S. Aggregate Bond Index (-1.36%).
On Thursday, February 2, the S&P 500 and Nasdaq rose to their highest levels in about five months after Facebook parent Meta Platforms posted upbeat Q4 corporate earnings, lifting other technology issues as well. After the Fed hiked its key lending rate by 25 basis points (bps) on Wednesday, investors appeared to interpret Powell’s post-meeting comments as being more dovish than many had expected—leading some pundits to believe the end to this tightening campaign was near. However, economic data released during the day showed first-time jobless claims for the week prior fell to a nine-month low of 183,000—suggesting the U.S. labor market remains resilient. The 10-year Treasury yield rose one bp, closing out the day at 3.40%, while the one-month Treasury yield rose three bps to 4.62%.
U.S. stocks fell on Friday, February 3, after an eye-popping jobs report and a pair of disappointing tech earnings reports weighed on the markets. The U.S. Bureau of Labor Statistics reported the U.S. economy added 517,000 jobs in January, easily beating analysts’ expectations of 187,000. The unemployment rate declined to 3.4%, its lowest since 1969, raising concerns the Fed will need to be more aggressive hiking rates in its battle against inflation than is already baked into market returns. The Nasdaq snapped a three-day winning streak after Amazon and Alphabet both reported worst-than-expected Q4 earnings. In other news, the Institute for Supply Management said its services index rebounded to 55.2% in January after showing signs of contraction (49.6%) in December. The 10-year Treasury yield rose 13 bps to 3.53%.
U.S. stocks carried the downdraft from the prior week to Monday, February 6, as investors continued their handwringing over expectations of how high the Fed’s terminal rate will need to rise after the strong January labor report. In addition, investors appeared to be reacting to the growing geopolitical discord between the U.S. and China after President Joe Biden ordered a purported Chinese weather balloon flying over the U.S. be shot down. The Hang Seng slumped 2% on the day. Investors pushed the 10-year Treasury yield up 10 bps to 3.63%.
The DJIA snapped a three-day losing streak on Tuesday, February 7, after Fed Chair Powell said, “The disinflationary process, the process for getting inflation down, has begun…But it has a long way to go.” In his comments, he indicated that inflation would decline significantly in 2023, but more rate hikes will be needed. The 10-year Treasury yield rose four bps to 3.67%.
On Wednesday, February 8, the Dow and the Nasdaq fell 0.6% and 1.7%, respectively, on the day after several Fed officials stressed the fact that more interest rate hikes were needed and they would keep monetary policy restrictive. Fed Governor Christopher Waller warned that the battle against inflation is not over and could result in higher interest rates to eradicate the intense price pressures. The 10-year Treasury yield declined four bps to 3.63%
Exchange-Traded Equity Funds
Equity ETFs experienced net inflows for the third week in a row, attracting a little more than $3.9 billion for the most recent fund-flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$1.7 billion), injecting money for the second consecutive week, while nondomestic equity ETFs witnessed their seventh week of net inflows in a row, taking in $2.2 billion this past week. International equity ETFs (+$2.2 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by the small-cap ETFs (+$2.1 billion) and sector-financial/banking ETFs (+$1.3 billion). Meanwhile, large-cap ETFs (-$1.7 billion) suffered the largest net outflows, bettered by sector-energy ETFs (-$1.0 billion).
BNY Mellon US Large Cap Core Equity ETF (BKLC, +$1.2 billion) and iShares Russell 2000 ETF (IWM, +$790 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (SPY, -$2.9 billion) experienced the largest individual net redemptions and Energy Select Sector SPDR ETF (XLE, -$674 million) suffered the second largest net redemptions of the week.
Exchange-Traded Fixed Income Funds
For the sixth week in seven, taxable fixed income ETFs witnessed net inflows, taking in $463 million this week. APs were net purchasers of flexible ETFs (+$902 million), corporate investment-grade debt ETFs (+$681 million), and corporate high-yield ETFs (+$546 million), while being net redeemers of government-Treasury ETFs (-$1.9 billion).
WisdomTree Voya Yield Enhanced USDE Universal Bond Fund (UNIY, +$1.1 billion), iShares 10-20 Year Treasury Bond ETF (TLH, +$305 million), and BNY Mellon High Yield Beta ETF (BKHY, +$271 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares 7-10 Year Treasury Bond ETF (IEF, -$959 million) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, -$821 million) handed back the largest individual net redemptions for the week.
For the third week in a row, municipal bond ETFs experienced net outflows, handing back $475 million this week. SPDR Nuveen Bloomberg Muni Bond ETF (TFI, +$23 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares National Municipal Bond ETF (MUB, -$268 million) experienced the largest net redemptions in the subgroup.
Conventional Equity Funds
Conventional fund (ex-ETF) investors were net sellers of equity funds for the fifty-third week in a row—redeeming $3.8 billion—with the macro-group posting a 0.77% market decline for the fund-flows week. Domestic equity funds, suffering net redemptions of slightly less than $3.7 billion, witnessed their sixth consecutive week of net outflows while posting a 0.44% market drop on average for the fund-flows week. Nondomestic equity funds—posting a 1.52% weekly market loss on average—observed their forty-fifth straight week of net outflows, handing back slightly less than $170 million this week.
On the domestic equity side, fund investors, while injecting $160 million into small-cap funds, were net redeemers of large-cap funds (-$1.9 billion) and mid-cap funds (-$874 million). Investors on the nondomestic equity side were net purchasers of international equity funds (+$113 million) while being net redeemers of global equity funds (-$283 million) for the week.
Conventional Fixed Income Funds
For the fifth consecutive week, taxable bond funds (ex-ETFs) witnessed net inflows—taking in $3.4 billion this past week—while posting a 0.88% market loss on average for the fund-flows week. The corporate investment-grade debt funds macro-group (+$2.2 billion) attracted the largest amount of net new money of the taxable bond funds group for the week, followed by flexible funds (+$595 million) and international & global debt funds (+$255 million). Balanced funds (-$165 million) suffered the largest net redemptions, bettered by government-Treasury funds (-$76 million).
The municipal bond funds group posted a 0.33% market loss on average during the fund-flows week (their second weekly market decline in three) but witnessed net inflows for the fifth week in a row, taking in $1.2 billion this week. High-Yield Municipal Debt Funds (+$594 million) attracted the largest net inflows of the macro-group, followed by General & Insured Municipal Debt Funds (+$535 million).
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