There is an age-old saying in investing in the stock market that earnings drive stock prices. That may be true on the fundamental side of investing theory, but certain mechanics in the market actually drive the markets more than fundamental theory. Quite simply, more money from buyers (inflows) than there are sellers (outflows) will drive the stock market higher. The other side of the coin is that a higher amount of outflows than inflows will drive the market down.
Some of the market volatility can of course be blamed on profit taking and on certain volatility trades continuing to be a tail that can wag the dog. And there are also fears of the next presidential tweet, a trade war with China and a whole host of other concerns.
The one thing that is hard to argue about is the mechanics of the stock market throughout the month of March. According to the Investment Company Institute, the rolling four weeks of March saw roughly $21.5 billion in net domestic equity selling out of long-term mutual funds and exchange traded funds (ETFs). This may not account for active trading money, hedge funds and privately managed accounts, but it captures a massive amount of the investing market and is generally correlated with other investment trends.
Global equity funds saw a net inflow from U.S. investors of more than $14.6 billion in March. The breakdown for each week’s outflows (−) versus inflows in domestic equity funds was far worse, and was shown as follows:
- 3/28, −$12.554 billion
- 3/21, −$17.107 billion
- 3/14, +$19.062 billion
- 3/7, −$10.973 billion
The Investment Company Institute showed that the weekly fund flows are estimates that represent industry totals and that the estimates are based on more than 98% of mutual fund and ETF assets. Actual mutual fund net new cash flows and ETF net issuance are reported separately on a monthly basis. For the last week of March, estimated mutual fund outflows were $4.03 billion, while estimated negative net issuance for ETFs was $9.07 billion.
Total ETF and mutual fund inflows and creations were shown to be more than $15 billion in the combined four weekly reports covering March of 2018. But isn’t the notion that an expectation for higher interest rates in the year ahead supposed to be bad for bonds? If only the world could even exist in a vacuum for a few days …
A separate report from the Institute of International Finance indicated that investors pulled out $40 billion from stocks since the middle of March.