Here’s What Fund Flow Data Is Telling Us
According to AMG data, investor appetite for equities is steadily increasing,
while demand for fixed income funds remains strong.
Equities
For the week ended June 18, investors allocated $4.3 billion to equity funds,
bringing this year’s total inflows to a little over $30 billion. Keep in mind
that during the first six months of last year, investors allocated $70 billion
to stock mutual funds, so any notion of “equity exuberance” at this stage is
clearly overdone.
Fixed income
Investors continue to allocate money to fixed income funds, as they put $1.6
billion to work in this category. For the year, bond funds have witnessed $85
billion worth of inflows–almost three times that of equity funds–again
suggesting that a bubble in the equity markets is far from reality.
Comments
The American economy is indeed improving, as evidenced by the most recent
data releases, including the ISM numbers and regional Fed surveys. Continued
accommodative monetary policy, coupled the effects of the upcoming tax cuts,
will only further encourage the economic recovery. Corporate balance sheets have
been significantly improved, as evidenced by the narrowing spread between
Treasuries and corporate bonds–suggesting that business health is recovering
nicely. Additionally, investor risk appetite is also improving considerably,
however, fund flow data and the ratio of cash to the Wilshire 5000
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suggests that a bubble in the equity markets is not a current reality.
The Fed
For the past few days, the fed funds futures have oscillated between pricing
in a 25 and 50 basis point rate cut by the FOMC next week. However, during this
same period, the US dollar has strengthened considerably, particularly against
the euro and Swiss franc, on the expectation that interest rate differentials
will narrow–basically, the foreign exchange markets have concluded that 25
basis points will be next weeks likely outcome. And these markets have been good
prognosticators in the past.
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