Stock market volatility has soared around the world in the last couple of weeks, highlighted by the Dow Jones Industrial Average plunging by 1,086 points at the opening on Monday, August 24 following the loss of over 500 points on the previous Friday.
US stocks, as measured by the Dow and the S&P 500, plunged around 14% from the peak in late May amidst growing concerns over China’s slowing economy and the recent currency devaluation. This is causing problems in other emerging nations which depend heavily on China. While the markets have recovered somewhat, no one knows if we’ve seen the bottom.
It was a wake-up call for investors who had seen nothing but record high after record high for the last six years. Investors pulled the most money in one day from stock exchange-traded funds and mutual funds on Tuesday, August 25 since 2007, a clear sign of waning confidence.
Daily fund flows showed a massive $19 billion in redemptions from stock funds on Tuesday, August 25 alone, according to data from EPFR Global analyzed by Bank of America/Merrill Lynch. And that Tuesday was not an anomaly – since the sharp stock selloff began the week before last, investors have been taking money out of the market in droves.
Between Thursday, August 20 and Wednesday, August 26, investors took out a net $29.5 billion from US stock funds. It was the largest weekly outflow on record since data began being calculated, according to BofA/Merrill. And the mass redemptions were not limited to the US.
CitiGroup reported that investors yanked another $29.5 billion out of global equity funds in the week ended August 26, the biggest single-week outflow on record as markets around the world went into meltdown mode.
For all of last week, Asia funds saw $4.9 billion in redemptions, the largest on record according to Citi. European funds, which broke their chain of 14 weeks of inflows, witnessed $3.6 billion in outflows for the week. The carnage was everywhere, especially in emerging markets which have been the darlings of investors for the last couple of years.
The large outflows speak to the intensity of investor fear over the past couple of weeks, which has been a wild ride for anyone with money in the stock market. Retail investors are dumping their investments and moving to cash at levels not seen since the financial crisis of 2008.
Normally when investors panic about stocks falling, they sell stocks and buy bonds, which are viewed as safer. But that’s not happening now. Investors aren’t just fleeing stocks – they’re exiting bonds, commodities and international funds too. July and August will be the first two-month stretch that retail investors have pulled money from BOTH stock and bond funds since the end of 2008.
According to the Investment Company Institute, which tracks mutual fund money flows, US retail investors held 89% of domestic mutual fund shares in 2014. Economists worry that the lack of confidence in the stock markets may lead households to cut back on spending. However, retail sales rose a respectable 0.6% in July (latest data available), and the two prior months were revised upward.
There are also mounting concerns about the upcoming Fed policy meeting on September 16-17 when the FOMC will consider raising the Fed Funds rate for the first time since 2006. Members of the policy committee have put out mixed signals over the last couple of weeks regarding “lift-off.”
The Fed’s interest rate decision later this month will be a difficult one. On the one hand, we had the much stronger than expected 2Q GDP report showing growth of 3.7%, which normally would be the “all-clear” signal to hike. On the other hand, the Fed seemingly cannot ignore the recent plunge in the equity markets. If the stock markets remain as volatile as they have been over the last two weeks, I would expect the Fed to hold off once again.
Finally, perhaps the most important report of the summer – as it relates to the Fed’s decision – will be tomorrow’s unemployment report for August. The pre-report consensus is that the headline unemployment rate will be unchanged at 5.3%, with net new jobs of about 215,000.
It’s difficult to grasp how significant or large (“massive”) these withdrawals and redemptions are without some context. In other words what proportion of this amount compared to the total stock funds (mutual funds?) value and the US total market capitalisation.
Do EPFR, Citi or Merrill Lynch provide this?