The market breathed a heavy sigh of relief after two headwinds were essentially removed at the same time: election uncertainty was resolved, and hope emerged for a humanitarian resolution to the pandemic.
The pandemic, however, has brought about a significant amount of change, disruption, and loss, and we are not yet out of the woods. COVID-19 case rates continue to increase and are now past levels seen during the onset of the pandemic.1 Jobless claims in the US recently rose for two consecutive weeks for the first time since July.2 Yet, global equity markets are at record highs and the standard 60/40 portfolio is poised once again to post double-digit returns (up 10%).3
While the market breathed a sigh of relief in November, it may have to periodically hold its breath until the vaccines have been broadly administered and case rates fall precipitously alongside an uptick in more consistent economic growth. We are likely embarking on a period of recovery, but we will also still be adjusting to the continued evolution of corporate and consumer behaviors resulting from the crisis. For investors, the next few months may feel like staring at the end of a long tunnel, looking forward to being on the other side of an unimaginable mess.
Asset class ETF flows: Breaking records
With the market striking a decidedly risk-on tone, investors turned to ETFs to implement positions quickly and with precision. In November, ETFs gathered $94 billion of inflows—a record monthly high. This one-month record haul accounts for 21% of the full-year 2020 total, a figure that is now only $14 billion shy of 2017’s $456 billion annual record flow figure. Based on the five-year December average flow total of $50 billion, it seems 2020 is likely to set a record for full-year flows.
Given the strength in equity markets, equity ETFs were the main beneficiary as investors sought to deploy cash that may have been sitting on the sidelines. Equity ETFs saw inflows of $81 billion, as shown below, which was enough to overtake fixed income in terms of year-to-date flow totals.
Fixed income ETFs continued to benefit from a secular shift into the asset class, even though the tone switched from defense to offense quite significantly. The $17 billion accumulated in November marks the tenth month of inflows greater than $10 billion for bond ETFs. As a result, it is highly likely the category will surpass $200 billion in annual flows for the first time. A high estimate would be $208 billion of inflows by year-end (based on the one-year monthly flow average figure) with a low estimate of $201 billion (based on the five-year average monthly flow figure).