Displaying items by tag: equities

April was marked by a mean reversion as robust inflation data and continued economic resilience dampened expectations of Fed dovishness later this year. As a result, flows into equity ETFs dropped from $106 billion in March to $41 billion in April. 

In contrast, flows surged into fixed income ETFs, increasing more than 60% to $27.4 billion. Lower-risk government bond ETFs attracted the most inflows at $10.1 billion, which was the highest since October of last year. Within the category, short and intermediate-term Treasuries captured the most inflows. 

In the US, flows into fixed-income ETFs were greater than equity ETF flows, at $15.2 billion vs. $14.1 billion. Scott Chronert, the global head of ETF research at Citi, noted “US-listed ETF flows decelerated this month against a generally risk-off backdrop. Underlying trends also pointed to more cautious positioning. Fixed income led all asset classes, but the gains were skewed towards core products, shorter durations, and Treasuries.”

Until something material changes in regard to inflation or the economy, it’s likely that investors will continue to favor ETFs that benefit from short-term rates remaining higher for longer. 

Finsum: Fixed income inflows into ETFs sharply increased in April, while equity inflows declined. This was a downstream effect of reduced expectations of Fed rate cuts in the second half of the year due to an uptick in inflation.

Bonds and stocks were higher following the Federal Reserve’s decision to hold interest rates steady. The rally was a result of Fed Chair Powell reaffirming that rate cuts were still on track for later this year. He also added that the ‘policy rate is likely at its peak’. 

The dot-plot also showed that FOMC members are forecasting 3 rate cuts by the end of the year, which is in line with the market’s consensus and a reduction from their previous forecast of 4 rate cuts. Committee members also upped their forecast for GDP growth to 2.1% from 1.4%, while modestly lowering their forecast for the unemployment rate to below 4%. 

According to Fed futures, there is a 75% chance that the first rate cut will be at the June meeting. However, the larger message from Powell is that the Fed can afford to be patient given that the economy remains in a healthy place despite restrictive monetary conditions. 

Another catalyst for equities and fixed income was Powell’s comments on the balance sheet runoff. So far, the Fed has reduced its balance sheet by about $1.4 trillion since June 2022 by letting proceeds from maturing Treasuries and mortgage-backed securities roll off the balance sheet instead of being reinvested. Powell indicated that this round of quantitative tightening was nearing an end and that discussions were ongoing about when it would be ‘appropriate to slow the pace of the runoff fairly soon’.

Finsum: Stocks and bonds were higher following the Fed’s decision to hold rates steady. Two particular catalysts were Chair Powell’s affirmation that the Fed’s next move would be to cut rates and comments about slowing the pace of quantitative tightening.  

2024 has seen the stock market make 17 closing, all-time highs. Despite this strength, many are noting some reasons to be cautious about equities due to some concerning developments under the surface.

In essence, the strong performance of the indexes and mega-cap technology stocks is masking hidden weakness. This is reflected in the Dow Jones Transportation Average failing to confirm the new highs of the Dow Jones Industrial Average which is a ‘non-conformation’ according to Dow Theory. Dow Theory warns that a new high by the Industrials but not by transportation stocks is prone to failure. Similarly, riskier parts of the market like high-yield bonds and high-beta stocks are also underperforming Treasuries and low volatility stocks, respectively. 

The leader of this bull market has been technology due to excitement around AI and strong earnings growth from leading tech companies. However, there are signs of exhaustion as the relative ratio of the S&P 500 tech sector has failed to confirm the breakout in the S&P 500. According to David Rosenberg, the founder and President of Rosenberg Research, “These were the most important stocks for the market, and no longer look to be in control.” He believes that the longer these measures fail to confirm the new highs in the S&P 500, the larger the risk of a reversal. 

Finsum: 2024 has been a strong year for the stock market with the S&P 500 making new highs. Yet, there are some signs that the rally may be nearing exhaustion. 

Category: Eq: Total Market 

Keywords: #S&P 500; #bull market; #tech; #equities; #risk; 

Growth has consistently outperformed value since the Great Recession. For a while, this was attributed to the Fed’s dovish policies, however this has now continued even during this period of substantially higher rates. 

There are some indications that investors should consider rebalancing between value and growth to maintain diversification, since they may be overexposed following growth’s significant outperformance over the past year. In reality, the opposite is happening as inflows are heavily skewed towards technology. 

Over the past year, net inflows into technology ETFs amounted to $18 billion which is nearly equivalent to net outflows in all other sector ETFs. This is also exacerbated by the massive size of the largest 7 technology companies which have become dominant in market-cap weighted indices. 

Another reason to consider value is that it would likely outperform in adverse market conditions given lower multiples and less froth. This could be a prudent choice for investors who are on the sidelines but wary of risks like a recession or inflation. 

Additionally, value tends to do well following periods of froth in markets. For instance, value outperformed in the years following the bursting of the dotcom bubble and the frenzy in equity markets during the pandemic. If valuations revert to the mean, then it could also set the stage for a value renaissance. During these periods, the best performing stocks tend to produce high levels of free cash flow relative to their market caps while maintaining strong balance sheets. 

Finsum: Value underperformed growth by a significant degree over the past year, continuing the prevailing trend of the last decade. Here’s why investors should consider increasing exposure to value ETFs. 

Alternative investing was ascendant following 2022 when both stocks and bonds were down double-digits. The asset class proved its worth as it delivered positive returns while reducing portfolio volatility. 

2023 has followed a different script as the S&P 500 finished the year at new all-time highs, gaining 24%. Bonds also finished the year with healthy gains while continuing to provide attractive levels of income for investors.

Yet, there are no indications that demand for alternative assets is eroding. In fact, many wealth managers are now recommending an allocation of between 15% and 25%. According to Paul Camhi, a senior financial advisor at The Wealth Alliance, “Even after a great 2023 for stocks and bonds, we still believe that owning alternative investments as part of a properly diversified portfolio makes sense. We include these strategies as part of our strategic, long-term allocation, not as tactical short-term investments.”

Additionally, a survey of advisors by iCapital revealed that 95% plan to increase or maintain current levels of exposure. The survey also showed that 60% of advisors expect alternatives to outperform public markets this year. Within alternatives, private credit has seen the largest share of inflows. Buffered ETFs are also increasingly popular, especially for retired investors as they provide protection during periods of elevated volatility while still providing upside exposure during bull markets. 

Finsum: Alternative investments continue to see healthy inflows despite the strong performance of equities and bonds. Many now see continued benefits as it provides differentiated returns and diversification to portfolios.