By Michael Wursthorn
The S&P 500 is having its best run in six years, but
individual investors are fleeing stock funds at the fastest pace in
decades.
That is potentially a good sign for the long-running bull
market.
Investors have pulled $135.5 billion from U.S. stock-focused
mutual funds and exchange-traded funds so far this year, the
biggest withdrawals on record, according to data provider Refinitiv
Lipper, which tracked the data going back to 1992.
Analysts say the trend highlights investors' apprehension toward
a stock market buffeted by the long-running U.S.-China trade war
and lingering worries about a potential recession. Stock funds have
bled money over seven consecutive quarters, dating to the second
quarter of 2018 -- when trade tensions between the U.S. and China
ratcheted higher.
The outflows are also a sign that investors aren't chasing the
stock market's strong performance, either. This suggests major
indexes like the S&P 500 still have plenty of room to run after
a decadelong rally.
Investors have shifted hundreds of billions of dollars into
bonds and money-market funds, areas considered to be harbors from
volatility. A trade deal could pull some of that money back into
stocks -- many of which are trading at relatively reasonable
valuations and offer dividends that top yields on U.S. Treasury
bonds. For the week ended Dec. 4, for example, investors put nearly
$5 billion back into U.S. stock funds -- the biggest weekly inflows
in three months -- on trade optimism, to help somewhat stem the
tide of withdrawals.
"There's not a lot of faith in this market," said Scott Wren, a
senior global equity strategist at Wells Fargo Investment
Institute. "There's no chasing going on. Usually before you hit the
top in a cycle, there's a lot of chasing and fund flows are
higher."
Mutual funds account for most of the outflows. Roughly $220.8
billion has been pulled from stock-focused mutual funds this year,
mostly actively managed strategies that have struggled over the
past 10 years, according to Refinitiv. Meanwhile, $85.3 billion has
flowed into equity ETFs, but those flows are at an eight-year
low.
The outflows haven't hindered the stock market's run: The
S&P 500 has risen 25% this year, on pace for its strongest gain
since 2013. This is a reminder that individual investors are just
one component of demand, and one that has grown less significant in
recent years as corporate share buybacks have grown more important,
analysts said. Fund flow figures also don't account for investors'
individual stock purchases.
Companies themselves have been the biggest buyers of stock
through share repurchases in recent years. After taking into
account any stock compensation passed on to employees, net
corporate purchases of U.S. stocks are expected to total $480
billion this year, according to Goldman Sachs.
The heavy spending on share buybacks has helped the stock market
hit fresh highs and avoid deeper pullbacks over the past two years,
despite lackluster demand from households, pension funds and
foreigners.
But analysts say companies can't sustain the pace of those
buybacks, leaving the market potentially vulnerable if other
investors don't pick up the slack. Corporate demand for equities is
already down 20% from last year, Goldman said, as tepid earnings
growth, along with trade and political uncertainty, have led
companies to trim their spending. The slowdown is expected to
stretch into next year, Goldman adds, knocking net corporate stock
purchases down an additional 2% to $470 billion.
Individual investors also appear to be less bullish. The weekly
investor sentiment survey by the American Association of Individual
Investors shows the eight-week moving average of bullish investors
at 36% of those surveyed for the week ended Dec. 5. That is up from
a low of 27% in July, but below a peak of 50% in early 2018 as
investors digested a U.S. corporate tax cut.
In the first quarter of 2018, roughly $68.6 billion flowed into
U.S. stock funds, according to Refinitiv.
Analysts say the recent exodus from U.S. equity funds reflects
investors' wariness toward stocks at a time when the market is
susceptible to sharp swings on trade-related headlines or weakening
economic figures. Just last week, the stock market's tranquility
was punctured after President Trump signaled tensions with China
could stretch well into next year. His comments sent the Dow Jones
Industrial Average down 280 points, its worst day since early
October.
Investors have sought to insulate themselves from those shocks.
Wells Fargo's Mr. Wren says clients of the bank's wealth-management
arm have been holding more of their assets in cash and bonds.
Brokerage firm TD Ameritrade Holding Corp. says its clients have
mostly sold stocks over four of the past five months through
October and bought fixed-income products. Apple, which is up 72%
this year, counted as one of investors' most sold stocks at the
firm in October, along with Tesla Inc. and Netflix Inc.
That aligns with broader market moves. Investors have put
roughly $277.2 billion into U.S. bond funds so far this year, the
third biggest sum over the past decade, while $482.8 billion has
flowed into money-market funds, an 11-year high, according to
Refinitiv.
Those more conservative investment stances have also hampered
investors' returns relative to the S&P 500's rise this
year.
Ted Darling, a 56-year-old investor in Cape Elizabeth, Maine,
said he hasn't been bullish on stocks this year. He has moved more
of his money into Treasury inflation-protected securities, bond
funds like the Vanguard Total Bond Market ETF and other assets,
such as gold and silver.
His view: Inflation will eventually move higher, while economic
growth will further slow, crimping corporate profits.
His diversified portfolio has returned roughly 11% through
November, and he acknowledged his positioning is conservative
compared with financial advisers' typical recommendations that
investors split their assets 60%/40% across stocks and bonds.
"I forewent a lot of opportunities," Mr. Darling said, referring
to the fact that he hadn't fully enjoyed the stock market's run up
this year. "But I'm being really cautious."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
December 08, 2019 05:44 ET (10:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.