When a Major League Baseball player steps into the box, he has a 2.3% chance of hitting a home run.1 The chance the next batter also goes yard is just 0.07%. Yet, “pairs” do happen, roughly 130 times a season.2
Already, there have been more than 120 pairs this year — and there are still two full months to go in the season. That number could grow to 180 based on the current trend of 3% of plate appearances resulting in home runs so far this year.
But Major League hitters aren’t the only ones enjoying more back-to-back home runs than usual this summer. Stocks are in the game, too. Fresh off a 5.6% gain in June, global stocks surged 3% in July and are now up over 16% in 2023. Back-to-back monthly gains of more than 3% for global stocks have happened in only 7% of occurrences since 1988.3
And like the “Bash Brothers” from the late 80s’ Oakland A’s, ETF inflows also went back-to-back in July.
Equity exposures fueled a second consecutive month with more than $50 billion of ETF inflows. This is the first time all year that ETFs broke that $50 billion barrier in back-to-back months.
With almost $40 billion of inflows in July, equity exposures have now taken around $120 billion over the past three months. This pushed the rolling three-month differential between equities and bonds to $70 billion, showing risk-on positioning.
Despite bonds adding roughly $50 billion over the past three months, this flow variance is in the 70th percentile over the past five years, a stark reversal from April’s 9th percentile.
Still, bond ETFs continued to gain market share. The more than $110 billion of inflows in 2023 represents 8.9% start-of-year bond assets, compared to equity flows equating to 3.2% of their assets at the beginning of the year, as shown below.
Total assets for bond funds now sit at $1.43 trillion. And if bond funds continue to grow at the rate they have in 2023 (~$16 billion a month of inflows), total bond ETF assets could surpass $1.5 trillion by the end of the year.
Commodity funds have not witnessed the same buying behavior. Gold funds posted outflows for the second consecutive month and broad commodity ETFs registered their 11th month in a row with outflows — a record run of negativity totaling more than $6 billion of outflows.
Asset Class Flows
In Millions ($) | July | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
---|---|---|---|---|---|
Equity | 39,885 | 163,707 | 118,961 | 340,716 | 3.25% |
Fixed Income | 15,637 | 116,663 | 50,044 | 217,809 | 8.98% |
Commodity | -1,622 | -1,562 | -2,872 | -13,982 | -1.18% |
Specialty | 210 | -578 | -405 | -1,201 | -11.47% |
Mixed Allocation | 79 | -1,948 | 124 | -616 | -10.09% |
Alternative | 216 | 462 | 306 | 1,546 | 8.32% |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of July 31, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance. |
US-focused exposures’ $32 billion represented most of the geographical inflows last month. And the more than $100 billion taken in by US-focused ETFs over the past three months is roughly 90% of equities’ year-to-date total, as shown below.
While US-focused funds have the most flows this month and on a YTD basis, developed ex-US funds have the most consistent flow trends. The $3.5 billion of inflows marks the 37th consecutive month with inflows and their 16th month in a row with more than $1 billion — both records.
Outside of broad international exposures, European-focused outflows pushed the regional category lower. Meanwhile, a rotation toward Asian countries (India, Japan, and South Korea) fueled the $2.4 billion of inflows into single-country funds.
Geographic ETF Flows Signal a Rebound in US Interest Amid the Rally
In Millions ($) | July | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
---|---|---|---|---|---|
U.S. | 32,602 | 105,679 | 93,835 | 248,438 | 2.68 |
Global | 530 | -1,625 | 802 | 3,458 | -0.97 |
International-Developed | 3,618 | 31,026 | 15,910 | 56,860 | 5.56 |
International-Emerging Markets | 1,287 | 10,756 | 3,519 | 18,228 | 5.03 |
International-Region | -1,667 | 7,298 | -3,117 | 4,483 | 13.51 |
International-Single Country | 2,494 | 6,969 | 4,729 | 6,351 | 7.63 |
Currency Hedged | 598 | 2,554 | 2,187 | 1,788 | 18.72 |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of July 31, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance. |
Adding to the strength within the US, sectors had $7.5 billion of inflows in July — their most all year and since October 2022. Cyclicals led the strong flows, as those exposures took in almost $8 billion while defensives had outflows.
Cyclicals have now outpaced defensives for two consecutive months. This is the first time that’s occurred since the start of 2022, underscoring investors’ recent willingness to express risk.
Financials drove positive cyclical flows, as better-than-expected bank earnings repaired sentiment toward the industry after the mini-crisis earlier in the year. Financials now have more inflows than any sector this year.
But the strength in cyclicals was not all Financials; every cyclical sector had inflows in July. Continued allocations to cyclicals indicates firmer risk-on positioning by investors, and suggests they believe recession may not be on the horizon.
Sector ETF Flows Favor Cyclicals For the Second Month in a Row
In Millions ($) | July | Year to Date | Trailing 3 Mth | Trailing 12 Mth | Year to Date (% of AUM) |
---|---|---|---|---|---|
Technology | -386 | 824 | 2,146 | 2,226 | 0.55 |
Financial | 2,366 | 4,698 | 1,623 | 5,036 | 7.58 |
Health Care | -1,311 | -5,658 | -1,144 | -2,977 | -5.44 |
Consumer Discretionary | 938 | 3,863 | 2,456 | 2,637 | 16.87 |
Consumer Staples | 616 | 563 | -76 | 3,432 | 1.79 |
Energy | 1,486 | -9,756 | -3,141 | -9,021 | -11.26 |
Materials | 845 | -599 | -1,344 | -1,700 | -1.63 |
Industrials | 1,387 | 2,201 | 1,626 | 2,358 | 6.56 |
Real Estate | 906 | -2,225 | 747 | -2,116 | -3.18 |
Utilities | -199 | -189 | -268 | 344 | 0.72 |
Communications | 915 | 2,980 | 1,783 | 2,731 | 25.84 |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of July 31, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance. |
Bonds took in over $15 billion in July, and every bond sector contributed.
Government bond funds, led by long-duration exposures, had the most inflows. This is despite rates rising on the month and broad core bonds posting losses. Given the risk-on views expressed elsewhere, the flows into defensive government ETFs reflect a bit of a barbell approach from investors.
But not all bond sectors posted losses in July. The risk-on sentiment tightened credit spreads and fueled gains within high yield. With supportive returns for credit markets, credit sensitive segments had net inflows for the second consecutive month.
Investment-grade corporate bond ETFs had most of those flows. However, high yield took in $804 million and is now in net inflows over the past three months as investors dialed up risk.
Inflows into emerging market bonds and convertible securities also illustrate risk taking. The $429 million into convertibles comes one month after the sector had its most-ever flows for a month (+$620 million). The flows in July equate to 7.4% of start-of-month assets, the highest growth rate of any bond sector.
Bond ETF Flows Indicate Risk-On Positioning Amid the Rally
In Millions ($) | July | Year to Date | Trailing 3 Month | Trailing 12 Month | Year to Date (% of AUM) |
---|---|---|---|---|---|
Aggregate | 2,716 | 41,036 | 18,031 | 67,170 | 9.96 |
Government | 6,570 | 66,314 | 20,492 | 119,251 | 23.69 |
Short Term | -1,599 | 28,652 | 1,676 | 60,721 | 17.58 |
Intermediate | 2,580 | 13,512 | 5,970 | 24,219 | 16.01 |
Long Term (>10 yr) | 5,589 | 24,150 | 12,846 | 34,312 | 53.18 |
Inflation Protected | 139 | -9,125 | -2,846 | -18,628 | -11.71 |
Mortgage Backed | 415 | 6,243 | 2,632 | 9,771 | 12.78 |
IG Corporate | 1,689 | 10,364 | 4,913 | 20,900 | 4.57 |
High Yield Corp. | 804 | -2,929 | 440 | 2,899 | -4.44 |
Bank Loans | 35 | -1,960 | -181 | -4,732 | -14.70 |
EM Bond | 626 | 1,606 | 912 | 2,125 | 6.03 |
Preferred | 240 | 232 | 140 | -1,122 | 0.71 |
Convertible | 429 | -441 | 1,157 | -293 | -7.13 |
Municipal | 1,728 | 3,638 | 3,445 | 18,285 | 3.43 |
Source: Bloomberg Finance, L.P., State Street Global Advisors, as of July 31, 2023. Top two/bottom two categories per period are highlighted. Past performance is not a reliable indicator of future performance. |
The increased number of back-to-back bashes in baseball can be attributed to the ongoing emphasis on launch angle and exit velocity (and climate change). For stocks, it’s a matter of recessionary fears that are likely turning out to be just that: fears. Better-than-expected US economic data has led economists to rethink forecasts,4 as labor markets remain strong and the consumer resilient.5
Yet, in the US, this has created stretched valuations. The S&P 500’s price-to-earnings-next-12-months (P/E NTM) ratio of 20.5 is above long-term averages (18.5).6 This offers little fundamental cushion if the earnings trends slow or if a macro risk event shocks the market.
In fact, investors should temper their expectations for another month of equally strong returns. Global equities have posted three consecutive months of gains greater than 3% only twice before, with one time being after a horrific drawdown in 2020.7 (And, yes, I know the Cincinnati Reds just hit three home runs in a row in a July game versus Arizona. But the chance of back-to-back-to-back dingers is 0.001%.)
Anticipating that the market’s pitch will be tougher to hit in August than it was in June and July, investors should consider owning high quality bonds with attractive yields above that of equity cash flow yields, while mixing in international equities where strong earnings trends come with more constructive valuations.
For more insight into ETF flows along with the latest charts, scorecards, and investment ideas, visit Market Trends.