The recent rally in the stock market has been impressive, with the S&P 500 now up 15.1% since December 24, 2018. Turnarounds of this magnitude are often accompanied by positive flows into equity products, as investors become more confident in future prospects and increase their stock market exposure. However, as shown in this week’s chart, net cumulative equity flows since the beginning of 2018 remain in negative territory, as investors have failed to participate in this most recent rebound. But what kept them on the sidelines? And should we expect this trend to change?
One reason why flows have not rebounded has to do with a lack of change in the underlying fundamentals. The end of last year saw markets price in slower economic and profit growth, lack of progress on trade with China, and the potential for a Fed policy error. While the Fed has taken a step back and signaled that they will be patient going forward, trade tensions with China remain unresolved, earnings and economic growth have decelerated, and political uncertainty continues to hang heavy in the air. In other words, very little has changed; this is best reflected by the fact that the 10-year U.S. Treasury yield has not moved higher despite the rebound in the stock market, and suggests that skepticism and uncertainty might keep investors on the sidelines for a bit longer.
That said, there are reasons to expect that inflows could begin to accelerate. First, U.S. economic data has been better than expected, as evidenced by the Citi U.S. Economic Surprise index moving back into positive territory for the first time since November 2018. Second, interest rates have stabilized at current levels, and investors who had chased bond market performance in December may begin to rotate into equities. And third, risk parity and trend following strategies may begin to reallocate to equities as volatility has come back down and stock market technicals have improved. As such, the stock market looks positioned to continue climbing the wall of worry during the coming weeks.

ETF and mutual fund investors have not participated in the recent rally

$bn, cumulative flows start on December 27, 2017.


Source: Strategic Insight Simfund, Standard & Poor's, J.P. Morgan Asset Management. Fund flow data is weekly through 1/23/2019 and captures all registered product flows (open-end mutual funds and ETFs).