Investors Vote With Their Wallets

6/8/2015


Follow the money.

Watergate whistleblower Deep Throat is widely credited with being the first to give that advice, though the phrase was coined by the makers of the movie All the President's Men, not Deep Throat himself. However, the sentiment dates back far earlier. Try the Book of Matthew 6:21, "For where your treasure is, there will your heart be also."

Consumer-sentiment surveys depict a decline in confidence in recent weeks, but today we're digging a little deeper, following three money trails to learn whether people's actions line up with their words.

Trail 1: Sectors

So far this year, the S&P 1500 Index has risen 3% excluding dividends, with eight of the 10 sectors that comprise the index flat or higher. The energy and utility sector indexes have declined 2% and 8% respectively.

In contrast, the health-care index has risen 9%, while consumer discretionary and technology are up 5%. Health care has defensive characteristics, but consumer discretionary and technology are economically sensitive and seem unlikely to attract investors who anticipate a downturn.

After rallying in March and April, oil prices have trended lower. In addition, all the talk about rising interest rates (the Federal Reserve hopes to boost the federal funds rate this year) probably contributed to the decline of the high-yield utility sector.

Sentiment: The strength of consumer-discretionary and tech stocks is encouraging but far from conclusive, especially considering weakness in the cyclical transportation sector.

Trail 2: Mutual funds

Over the last nine weeks, a net $5.0 billion flowed out of open-end stock mutual funds while bond funds collected a net $14.2 billion, according to the Investment Company Institute. Data for exchange-traded funds isn't as detailed or timely, but April numbers suggest the investors fleeing stock funds didn't simply switch to stock ETFs, while assets in bond ETFs increased slightly. The disparity suggests a somwhat surprising lack of excitement about stocks relative to bonds.

MUTUAL-FUND FLOWS
-------- Est. Weekly Net New Cash Flows (Millions) --------
Week Ended
Total
Equity
($)
Domestic
Equity
($)
World
Equity
($)
Total
Bond
($)
4/1/2015
(1,498)
(3,302)
1,804
(1,296)
4/8/2015
1,902
(1,326)
3,228
1,860
4/15/2015
(2,651)
(5,697)
3,045
(327)
4/22/2015
3,140
(3,397)
6,537
3,770
4/29/2015
(3,192)
(7,269)
4,076
2,954
5/6/2015
1,367
(1,729)
3,096
2,461
5/13/2015
(2,800)
(5,052)
2,252
2,172
5/20/2015
(1,060)
(5,390)
4,330
1,985
5/27/2015
(223)
(2,870)
2,647
626
9-Week Total
(5,015)
(36,032)
31,015
14,205
Source: Investment Company Institute.

In each of those nine weeks, foreign stock funds gained assets while dollars flowed out of U.S. stock funds. For the entire nine-week period from March 26 through May 27, U.S. equity funds hemorrhaged $36.0 billion, while foreign equity funds sucked in $31.0 billion.

Sentiment: Nine straight weeks of eroding confidence in U.S. stock funds — while the S&P 1500 rose 2% — bespeaks real worry about the direction of the American stock market.

Trail 3: Consumer spending

Consumer spending has risen in every quarter since the second quarter of 2009. Inflation-adjusted spending growth has averaged 2.1% over the last four quarters and 1.8% since the start of 2013.

Sentiment: While consumers aren't spending aggressively (growth fell to 1.2% in the first quarter), recent activity doesn't suggest widespread fear. The 2.1% growth over the last year compares favorably to the average over the last 25 years (1.8%) and 50 years (2.0%).

Conclusion

Sentiment surveys are notoriously volatile, often reversing course with little warning. The money trails we followed suggest investors are in some ways pessimistic, as with their flight from U.S. stocks, but in other ways optimistic, as reflected by continued decent consumption spending.

Couple the lack of uniformity in consumers' use of money with the fact that individual investors aren't good at predicting market moves, and we end up where we were before our follow-the-money exercise: the land of mixed signals.


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