Liz Looks at: Where the Money is Going

By: Liz Young Thomas · February 03, 2022 · Reading Time: 4 minutes

Show Me the Flows

We managed to get out of January bruised, but alive. It’s tempting to call bottoms in a rough market, assume the worst is behind us, and proceed forward in hopes that things will only get better from here.

I think things will get smoother, but not necessarily better…that is, if we’re defining better as a new leg of a sustainable bull market.

One of the ways we can track investor sentiment and analyze the strength of a rally is to look at fund flows, which includes the dollars flowing into/out of ETFs, mutual funds, and closed-end funds. It also includes the money that hedge funds, insurance funds, and pension funds are buying or selling.

Equities posted a knockout year in 2021 with over $700b in net inflows — which is more than 2018, 2019, and 2020 combined. But after a January that saw the S&P 500 down 5.3% and the Nasdaq down 9.0% (second worst January on record), it begged the question of how sticky those flows would be.

Not surprisingly, January posted net equity outflows of $8.9b. But all things considered, that number is not too bad.

Fear of Valuations, Not Fear of Stocks

All of that volatility and the dramatic intraday swings meant the money was moving somewhere, but if not in a full sweep out of equities, it must’ve moved a lot within equities. And sure enough, investors weren’t ready to give up on stocks, but they were ready to unload the high valuation sectors and load up on defensives and value.

The most “growthy” areas of the market are Technology and Communications, which saw a combined $4.3b in net outflows, while the defensive and/or value sectors of Financials and Consumer Staples saw a combined $9.8b in net inflows.

A tightening environment may be new for many, but so far it isn’t scary enough to convince people there are better opportunities outside of stocks. And I agree, for the time being.

The Price is Right-er

It’s impossible to call a time when the price is exactly right. But the January correction got us closer to long-term average valuation levels. If investors are staying in equities and we have the toughest January since 2009 behind us, one could argue this is a good time to be picking up the investments that were on your wish list in 2021. But while you parse through that list, I’d caution you not to buy it all in one day — take the bit-by-bit approach. There is likely more volatility to come as we embark on the tightening cycle and you’ll have more than one opportunity. I’d also caution you against loading up on the high multiple growth stocks that were winners in the early part of this cycle. We’re in a new phase and new leaders will result. Choose wisely.


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