Although markets were risk-on by price action this week, investors’ broader positioning signaled some level of tepidness on the outlook for the near future.
Here’s how money moved around global markets this week, according to a fund manager survey from Bank of America Global Research:
- Equities: -$7.4B (that’s an outflow)
- Cash: +$22.7B
- Bonds: +$17B
- Investment Grade:+$14.7B
- High Yield Bonds: +$3.1B
- Municipal Bonds: +$1.3B
- Government Bonds: -$4B
This was the largest outflow from equities in 6 weeks, Bank of America said. And the world saw the third largest inflow to investment grade bonds ever. Investors were moving away from equities and into cash, which is a signal of weakening economic and earnings expectations. But it’s not as if investors were moving into safe government bonds. And investors were quite interested in risk assets that aren’t stocks, like corporate credit.
Before we analyze why investors are stomaching some risk in corporate credit, but not equities, let’s examine price movements first.
The S&P 500 rose about 2% this week, while global indices rose by a similar amount. In U.S. equities, the NYSE FAANG Index, the large-cap tech index home to the world’s most disruptive, growth oriented, powerful and dominant tech players, outperformed, up about 2.4%, even with a rough day Friday. Blowout earnings last week are causing another leg up for these stocks, which continue to create new growth opportunities and maintain lofty trading multiples. These stocks are largely powering though the economic headwinds. This week, a net $900 million went into tech stocks, while the larger growth stock landscape saw a marginal outflow and value saw a large outflow.
The 10-Year treasury yield rose to above 0.55% by Friday late afternoon, from 0.53% last Friday July 31. Yields rise when prices fall. That’s consistent with B-of-A’s government bond market data, although price movements in assets don’t always perfectly correlate with the capital flows in the survey. Treasury yields have been incredibly pressured in the larger scheme of things, given the uncertain economic environment and the fact that the bond investors expect the Federal Reserve to increase the size of its asset purchasing program in the event of higher treasury yields.
The iShares iBoxx High Yield Corporate Bond etf (HYG) - Get Report fell about two-tenths of a percentage point this week, while the iShares iBoxx Investment Grade Corporate Bond etf (LQD) - Get Report rose about 0.4%. These two corporate bond funds have been on the rise in the past month or so.
Bond analysts and fund managers TheStreet has spoken have said that investors are looking for yield currently and are uncertain about the direction of stock prices, given the uncertain trajectory of the earnings recovery in the U.S. So, in an attempt to find total return, investors are favoring corporate credit, which still offers a slightly wider spread over treasuries, historically, while most companies have unwavering access to capital. The Fed is buying bonds, keeping the cost of borrowing low, which enables companies to remain liquid during economic stress. Some companies close to bankruptcy are less able to access capital.
The point: the financial market has shown some risk-on instincts of late, but not entirely. Market messaging says we are not close to being out of the woods.