After any amazing athletic performance, the post-game interview always seems to begin with the question, “What was going through your mind during that play?”
And, most of the time, the answer contains the phrase, “I was feeling it.” Another common refrain, “I was just in the flow of the game.”
A player with the hot hand or catching fire is well-documented in basketball. Especially during “March Madness,” one player can get hot and turn the tide of a game. The NCAA hoops tournament gives us the best time to watch the flow in action. From Cinderella teams, to buzzer beater wins, to the next NBA superstar, one player in the flow of the game can make or break a season.
We also like to watch the money flows into different investment funds. It gives an idea where investors may be getting too aggressive and where risks are building. Quick outflows can also tell us where investors might be panicking. Contrarian investors can use this data to confirm an opposing view to the crowd. The contrarian can opportunistically express this view by buying and selling against the investors causing the panic.
Below is data from Morningstar compiling the total annual asset flows into mutual funds and exchange traded funds. The orange bar shows the largest inflows went into taxable bond funds in both 2016 and 2017. With rising interest rates and potentially negative returns, investors could be considering this an area to sell. Despite the strong returns in stocks the last several years, the dark blue representing US equities has few new cash inflows. The natural question would be, who is buying all of the stocks since they continued to move higher? One answer is that corporate buybacks have been the main source. Companies use cash flows and bond issuance for purchases, which decreases the shares outstanding. In turn, this pushes the earnings per share and stock prices higher.
So far in 2018, the 10% market selloff and rally resulted in selling of US equity funds, with a total of $24 billion flowing out as shown in the table below. While the market volatility is partially attributable to outflows, rebalancing portfolios also plays a role. As we noted in previous writings, U.S. households have the highest percentage of their assets in stocks since the tech bubble in 1999. To keep portfolio aligned with target allocations for the long-term, selling the outperforming stocks to buy bonds is likely occurring. Money also flowed to overseas equities where there are cheaper markets and solid global growth. Flows from investors into bond funds continued the trend from the last two years, especially on the taxable side. Commodity inflows more than doubled their total amount from 2017 – and this in only 3 months!
Source: ICI (week ending 3/14/18)
Finding and interpreting the flows of the market can put investors more in sync with markets. This allows for an understanding about how the rest of participants are thinking about market moves. Reading how others are acting can improve long-term positioning.
The upsets for the NCAA basketball tournament so far were great. Here’s hoping you find both flow and long-term success in your brackets after that first weekend.
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