One year ago, the announcement of a vaccine timeline ignited a global risk-on rally with stocks registering 79 new all-time highs over the last 12 months.1 This November, however, sluggish inoculation progress around the world has led COVID-19 to remain a risk.2 Not just a health risk, but a macro risk that can upend sentiment in a flash.
The headlines surrounding the omicron variant were a sharp reminder of this. And it made for a hard day’s night around the holidays, as volatility spiked and risk assets fell. Global equities finished down 2.5% for November, with only 35% of stocks posting gains for the month – down from 55% just five days prior.3
Omicron also reminded investors that it’s not always risk-on and that “stocks don’t always go up.” Resets will occur, and they can be healthy. Not that investors should have needed this reminder. Yet, the reaction over the last few days is not unlike the messages I am seeing in my timeline of how the latest Disney+ Beatles documentary “Get Back” made people realize the “Fab Four” were geniuses and a great band.
Despite the risk-off mood and omicron news, investor buying behavior was decidedly in an “Ob-la-di, ob-la-da, life goes on,” mindset as ETFs took in $67 billion – their 13th month in a row with more than $40 billion of inflows. In fact, after what seems like having inflows eight days a week, the $67 billion of inflows ranks in the top 10 (ninth) all-time – a list that now only features months from just the last year!
The strong flows last month were once again supported by equity exposures. Equity ETFs took in $54 billion in November, their ninth-most ever. This has occurred alongside steady, but not robust, demand for fixed income ETFs.
For example, as shown below, on a rolling three-months basis equity ETFs have outpaced bond funds by over $102 billion. This ranks in the 89th percentile and is the ninth-largest differential ever – not to mention another indicator of the “We Can Work It Out” buying behavior this year.
There is breadth associated with these equity flows as well, as 67% of funds had inflows last month. This compares to a historical median of 64%. This trend is consistent with flows for all of 2021, as the average percent of fund inflows for the year (67%) is also above the historical median. The magnitude and depth of equity flows have been uniquely driven by US equity exposures – both last month and throughout the year. In November, US equity exposures took in $42 billion – their tenth-most ever for a month.
In fact, US equity funds took in 79% of all equity flows, a rate that is above their current market share of assets within equity exposures (77%). Meanwhile, only two non-US segments had flows over $1 billion, and none of the segments had a participation rate (percent of funds with inflows) above its historical median, as shown below, unlike the trend within the US.
Yesterday our troubles were far away, but omicron delivered a reminder that it looks as though they’re here to stay. As a result, sector flows have been steady, but a bit disorderly as of late with sector positioning turning defensive in November. Defensive sectors took in $2.4 billion more than cyclicals, following two months in a row of cyclical flows outpacing defensives. Health Care, likely for its more quality balance sheet exposure, but also as a result of health-related news, was the primary driver for the defensive pivot, taking in over $1 billion.
Despite the positioning shift, flows into sector funds remained positive, as sectors, in the aggregate, took in $4 billion – their 14th month in a row with inflows (a record). Additionally, like broader US strategies, the participation rate was also above the long-term median.
The $11 billion of bond flows last month was below the 36-month average of $16 billion. As a result, breaking last year’s record haul would require $29 billion of inflows in December. Taking in that much in a month, however, has only happened three times before. So, for record flow hopes in 2021, we may have to let it be.
While the headline bond flows were dour, the beneath the surface flows made a sad situation better. TIPS ETFs continued their streak of 19 months in a row with inflows, taking in their second-most ever (+$4.1 billion). Loan ETFs continued to remain in favor as well, taking in nearly $562 million. Loans have now taken in over $10 billion in 2021 – a 120% organic growth rate.
Despite certain macro forces (slowing growth, high inflation, political conflicts in DC, and tighter/diverging monetary policy) and omicron making portfolios gently weep toward the end of the month, the path ahead remains constructive for risk assets given that growth and policies will still be supportive, even if waning. It just might be an environment that is a bit bumpier, and where it may take some time after a drawdown for portfolios to get back to where they once belonged.
Given this macro virus backdrop alongside a cycle that is maturing, rates that are low and below that of inflation expectations, and an inflationary environment that will likely impact segments differently, we feel you should consider blending quality growth with value, targeting real income opportunities, while seeking out sectors (Real Estate, Natural Resources) that may benefit from this no longer transitory inflationary regime.
1 Based on the MSCI ACWI Index, per Bloomberg Finance L.P. data as of November 30, 2021
2 "Vaccinated people are less likely to spread Covid, new research finds", NBCNews October 2021
3 Based on the MSCI ACWI Index, per Bloomberg Finance L.P. data as of November 30, 2021
Growth: Characterized by higher price levels relative to fundamentals, such as earnings.
Value: Characterized by lower price levels relative to fundamentals, such as earnings.
Quality: Characterized by firms with strong balance sheets and high profitablity
MSCI ACWI Index: A market-capitalization-weighted stock market index that measures the stock performance of the companies in developed and emerging markets.
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