This Is Where Investors Are Putting Their Money
p>For the week ended August 13, AMG data is reporting that equity funds–including
those that invest abroad–witnessed net cash inflows of $3.52 billion. Within this category,
$1.45 billion went into funds that invest in US equities. Year to
date, equity funds have reported inflows totaling $64.8 billion–which is still
below average considering that during the first half of the year for the past five
years, equity funds have reported inflows of $70 billion.
Taxable bond funds witnessed outflows totaling $2.5 billion for the week
ended August 13. Aggregate inflows for this year however, total $83 billion,
which is dramatically more than the amount reported during the same period in
1998 (+$44b), 1999 (+$20b) and 2000 (-$60b).
A sustained trend in outflows from bond funds into stock funds would signal
capitulation by the remaining bearish investors, which, in my view, would then
suggest that caution should be exercised by equity bulls. Until that time
however, there is still plenty of money on the sidelines–not only on the part
of retail investors but also on the part of pension and foreign investors–to
feed further gains in the S&P 500.
The chart below illustrates periods of extreme shifts in mutual fund flows
relative to the Wilshire 5000
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PowerRating) and has been a good contrarian market
indicator during periods of extreme inflows/outflows, such as in 2000 and last October.
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Keeping an eye on junk bonds
As some of you may recall, last Monday, I
recommended that readers focus their attention on the performance of the junk
bond spread over Treasuries in order to gauge how well the financial sector has
been able to withstand the sell-off in the Treasury market.Â
Although junk bonds are issued by
companies outside the financial sector, their performance is nevertheless a good
barometer of the overall health of the financial markets. The reason is that
investors who buy these issues not only assume balance sheet risk — as do other
corporate bond investors — but, due to the marginal credit quality of the firms
that issue these bonds, these investors are also very aware of changes in the
economy, as the performance of their holdings is contingent on any macro
developments. After all, the companies most sensitive to big shocks are the
usually the weaker ones.
Well, the S&P speculative grade (junk) index continues to hang on despite
some modest selling pressure it experienced over the past couple of weeks–in
the wake of the Treasury market sell-off. And this is certainly welcome news for
equity investors. Â