Global equities registered their seventh month in a row with gains, their longest stretch since 2018, and have now gone 217 days without being in a 5% drawdown — the third-longest streak ever.1
Given this strong momentum, markets appear to be weathering a confluence of macro risks that perhaps intuitively should have created a bit more off-screen turmoil: multiple hurricanes knocking large portions of the US off-line, increased tensions in the Middle East, softening economic data as measured by the continued decline in the CITI Global Economic Surprise Index, Federal Reserve taper talks, and the continued increase in COVID-19 cases leading to the approval of booster shots.
Like an ensemble television show that loses a key cast member, the market has adjusted. The 1990s NBC hit ER didn’t slow down after George Clooney left, the sentimental 1960s sitcom Bewitched swapped one Darrin with another, and Kirstie Alley seamlessly replaced Shelley Long on the 1980s hit Cheers. Like them, no matter what, this market’s show goes on.
Flows Top $800 billion over the last 12 months
With global capital markets rallying, investors continued gravitating toward ETFs at a record pace to deploy capital and position portfolios. The $72 billion of inflows in August marks the 10th month in a row where ETFs have taken in over $50 billion. This has pushed total 2021 flows to within $8 billion of the never-before reached $600 billion mark for a calendar year.
Based on these flow totals, our five-factor composite model projection2 for full-year 2021 figures now increases from $797 billion to $820 billion — a level, that if reached, would be 62% higher than 2020’s record $505 billion.
While we will have to wait four more months to see if this projection is accurate, there is already a 12-month time period where flows have surpassed $800 billion. On a rolling 12-month basis, as shown below, flows are $816 billion. This is a record for any 12-month stretch.
Rolling Fund Flow Totals ($ Billions)
The $72 billion in August is the seventh-highest of all time and is equally supported by top 10 months by equity ($53 billion, 7th) and fixed income ($20 billion, 8th) ETFs. Both asset bases have grown by over 10% this year, with fixed income growing at the higher rate (13%). Yet, equity flows are already at records ($444 billion), while fixed income flows are not. However, fixed income flows are likely to break last year’s record ($210 billion) if they maintain their current pace ($18 billion a month would equate to $217 billion for the year).
Sectors and Factors Favor a Quality Growth Bias on this Flow Show
Sector flows were positive once again in August, their 11th month in a row with inflows — tying the record for most consecutive months of flows. In aggregate, sector funds took in $7 billion in August, a sign of continued risk taking and investors expressing a desire to participate in the rally beyond allocating to plain vanilla beta exposures.
Beneath the sector surface, defensive sectors (+$3 billion) outpaced cyclicals (+$160 million) while secular growth areas (Tech and Comm. Services) each had over $1 billion — a sign of investors positioning toward more quality/reliable growth segments. Yet, Financials (a cyclical sector) did have over $2 billion of inflows, so there wasn’t complete uniform positioning beneath the surface.
The preference for growth, and quality growth for that matter, can be found in traditional style flows as well as factors. Traditional growth funds took in $7 billion, their fourth-most ever for a month. Meanwhile, quality factor funds amassed $1.3 billion – their fifth-most ever. In fact, for Quality, the rolling three-month excess returns of the MSCI USA Quality Index relative to the S&P 500 have coincided with the uptick in flows, as shown below.
Rolling Three-Month Quality Fund Flows versus Quality Factor Excess Return to Market
Big Flow Show for Bonds
Bond ETFs added $20 billion in August, their 33rd month out of the past 34 with inflows, as investors continue to increase their use of fixed income ETFs. The majority of flows went into Aggregate and IG Corporate segments. However, once again TIPS and Bank Loan ETFs had the most flows on a relative basis — both taking in over 4% of their start-of-month assets.
On a year-to-date basis High Yield is the only sector with outflows. Yet, when paired with the below investment grade Bank Loan category, the net flows are positive. And many investors have made that relative rotation in 2021, as high yield valuations are less attractive than loans.3 Not to mention that loans have the added potential benefit of a low duration (i.e., rate risk) with a similar yield profile, 3.8% for loans versus 3.9% for high yield.4
Fixed Income Flows
On the Next Episode Of….
So, where to from here? Does the market end up like Grey’s Anatomy and continue to weather departure after departure leading into the end of the year? Or will it be like those weird episodes of the final season of the first incarnation of Saved by the Bell where Tori inexplicably showed up and Kelly Kapowski and Jessie Spano were no longer part of the crew, and the show’s wheels fell off.
Looking ahead, it’s important to consider that while policies will still be supportive, growth is likely to slow and present headwinds for future returns. Technical indicators may start to show signs of stress (RSI is now at 65) if short-term gains persist. And political brinksmanship with respect to the debt ceiling, government shutdown and budget debates could be the one macro risk that creates drama for the market. Therefore, constructing core equities in a balanced fashion, with factors that could capture further upside appreciation but also that can mitigate the downside, may be a valued cast member to add to possibly ensure your portfolio’s show goes on.
1 Bloomberg Finance L.P., as of August 31, 2021. Based on the MSCI ACWI Index.
2 Trailing 12-month average, trailing 36-month average, quarterly average figure for historical Q3 and Q4 to reflect seasonality, average Q3 and Q4 figure that also includes the increase that Q1 and Q2 2021 had versus their historical average to account for cyclicality but also the current 2021 pace, 2021 average
3 Average price for high yield is $105 versus $98 for loans. S&P, Bloomberg Finance L.P., as of August 31, 2021. Based on the S&P/LSTA Leveraged Loan 100 Index and the ICE BofA US High Yield Index.
4 S&P, Bloomberg Finance L.P., as of August 31, 2021. Based on the S&P/LSTA Leveraged Loan 100 Index and the ICE BofA US High Yield Index.
S&P 500® Index
A market-capitalization-weighted stock market index that measures the stock performance of the 500 largest publicly traded companies in the United States.
MSCI ACWI Index
MSCI ACWI Index is a market capitalization-weighted index designed to provide a broad measure of equity market performance throughout the world.
MSCI USA Quality Index
The index aims to capture the performance of quality growth stocks by identifying stocks with high quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage.
S&P/LSTA Leveraged Loan 100 Index
Designed to reflect the performance of the largest facilities in the leveraged loan market.
ICE BofA US High Yield Index
A market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.
Bloomberg Barclays US Aggregate Bond Index
A broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Characterized by higher price levels relative to fundamentals, such as earnings.
Characterized by lower price levels relative to fundamentals, such as earnings.
Characterized by firms with strong balance sheets and high profitablity.
A term for rules-based investment strategies that don’t use conventional market-cap weightings.
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