Over the weekend, we reported that as a result of the Trump victory, the market underwent some truly staggering asset rotations and fund flows, leading to trillions in gains (for equities) and losses (for credit). Today, after the latest Lipper and EPFR fund flow data, we can say that the unprecedented fund flows have continued with numerous records being made out across the board.
According to Lipper data, in the week ended November 16, investors flooded $23.6 billion in new cash on U.S.-based stock funds over the latest week, the most in nearly two years and the third-largest haul for those funds on record. This number consisted of a record $27 billion inflow into equity ETFs, suggesting that even during moments of peak euphoria, active managers are unable to get funding: US-based equity mutual funds posted yet another $3.4 billion in outflows in the past week.
Meanwhile, as expected, US-based taxable bond funds saw substantial outflows, amounting to $5.9 billion in the 3rd straight week of outflows between mutual funds and ETFs. And don't even bring up Emerging Market bonds: those just saw record outflows.
This means that after years of predictions of a Great Rotation from stocks to bonds, it finally took place... but if you blinked too long, you missed it. Indeed, as The Long View twitter account puts it, "the democratization of investing has risks. Hot money creates skew as bigger crowds rush through illiquid exits en masse." Well, this week they were rushing out of anything rates related and flooding into equity linked products.
For a different perspective, this time through the eyes of EPFR, we go to Bank of America's Michael Hartnett who summarizes that week's events with two words: "Violent rotation", and goes on to list why:
Record inflows to equity ETFs, record inflows to financial sector funds, biggest bond redemptions in 3½ years, record redemptions from EM debt.
“Great Rotation” flows: largest equity inflows in 2 years ($28bn), biggest bond outflows in 3½ years ($18bn); widest weekly disparity between stock & bond flows ever.
Trading a secular inflection point: if BREXIT marked 5,000 year low in global interest rates, Trump marked moment investors started to position for bond bear market; note yields can rise quickly…price action always violently big at secular inflection points as overshoots corrected quickly (e.g. Jul’80-Oct’81 US bond yields surged from 10% in 16%; by Oct’82 yields back at 10%).
Bond vs Equity flows: past decade $1.5tn inflows to global bond funds vs $0 for global equity funds (Chart 4); mutual fund flows (excluding ETFs) show extreme divergence of $1.1tn bond inflows vs $1.3tn equity outflows (Chart 5).
Bond bloodbath: this week largest EM debt redemptions on record (Chart 2); largest muni bond outflows in 3½ years; largest Treasury outflows in 12 months. Dollar pain trades: surge in DXY>100 causes largest precious metals outflows in 3½ years & largest EM equity outflows in 14 months.
Inflation rotation: record financials inflows (monster $7.2bn – Chart 1); largest materials inflows in three years; 23rd week of TIPS inflows ($0.8bn); inflows to bank loan funds 18 of past 20 weeks.
Passive smashing active: note astounding contrast this week between record inflow to equity ETFs ($34bn) & 37th straight week of equity mutual fund outflows; since 2002, $2.1tn inflows to “passive” funds vs $1.8tn outflows from “active” funds (Chart 3).
Violence vs peace: what could temporarily arrest Nov stampede out of bonds...weak data…1st post-Trump data was strong weekly initial unemployment claims & poor weekly mortgage applications… numbers next week represent 1st “clean” post-election data…mortgage apps more imp for us…2nd consecutive weak mortgage applications reading (30-year mortgage rates up 40bps to 3.94% since election) needed to calm bond markets (data released 23rd).
Some more details on what has been a truly historic week:
Asset Class Flows
- Equities: largest inflows in 2 years ($27.5bn) ($34bn inflows to ETFs offset by $7bn outflows from mutual funds)
- Bonds: largest outflows since Jun’13 ($18.1bn)
- Precious metals: largest outflows since Jun’13 ($2.7bn)
Fixed Income Flows:
- Record outflows from EM debt funds ($6.6bn)
- Largest outflows from muni bond funds since Jun’13 ($3.0bn)
- Largest outflows from Govt/Tsy funds in 12 months ($3.4bn)
- Chunky $3.8bn outflows from HY bond funds (3 straight weeks)
- $2.4bn outflows from IG bond funds
- 23 straight weeks of TIPS inflows ($0.8bn)
- Inflows to bank loan funds in 18 of past 20 weeks ($0.6bn)
- EM: largest weekly outflows in 14 months ($5.4bn)
- US: largest weekly inflows in 2 years ($30.7bn)
- Europe: rare $0.8bn inflows (largest in 9 months)
- Japan: $1.0bn outflows (outflows in 3 of past 4 weeks)
- By sector: monster inflows to financials ($7.2bn) & healthcare ($3.1bn); largest materials inflows in 3 years ($1.4bn); 7 straight weeks of consumer outflows ($0.8bn)
* * *
And keep in mind this is just one week after the election results: the flow party is just getting started.
Traditionally, during such times of violent rotations, numerous hedge funds don't survive simply because they get caught up in the margin calls, are unable to sell at modeled prices and fail to reposition fast enough. We should know the names of the first casualties within days.