U.S. Stock Funds are Losing Investors

Investors are dumping U.S. stock funds at one of the fastest paces in a decade as rising market turbulence erodes confidence in the nine-year-old bull market.

U.S. equity mutual funds and exchange-traded funds recorded $2.4 billion in outflows for the week ended April 18, according to the Investment Company Institute. That followed $41 billion in outflows from these funds in February—the biggest monthly exodus since January 2008, ICI data show. Overall, investors have yanked $67 billion out of these stock funds since the start of February.

That rush for the exits marked a sharp reversal from January, when investors poured $10.8 billion into U.S. equity funds, helping propel major indexes to records.

“Suddenly it’s changed, and everyone is trying to get out of the crowded theater first,” said Darren Pollock, a portfolio manager for Cheviot Value Management, a Beverly Hills asset manager. “There was an opportunity to lock in gains from what had been such a strong rally, then step aside and see what happens next.”

While the outflows account for less than 1% of assets in U.S. equity funds, the flood of cash leaving stock funds marks a shift from the buy-the-dip mentality that characterized much of last year.

Back then, markets were calmer, and nearly every decline was seized as an opportunity for bargain buying. Solid corporate earnings, the slow advance of interest rates and a pickup in global growth forecasts gave stocks an added boost.

But that benign backdrop for stocks began to crumble this year amid signs that the economic expansion is driving up prices of goods and services. Inflation has become the biggest hazard for the aging bull market, spurring an early February selloff that sent Wall Street’s fear gauge soaring and shattered a prolonged period of market calm. The S&P 500 stock index has fallen 7.2% from the all-time high reached in January.

The appetite for U.S. equities may be stronger than fund flows indicate, said Shelly Antoniewicz, senior director of industry and financial analysis at ICI. Younger investors are buying U.S. stocks but have less money saved, while wealthier baby boomers are shifting out of stocks and into bonds as they near retirement. And some mutual-fund managers used February’s selloff as a chance to buy $8.6 billion in U.S. stocks despite investors’ withdrawals of $19.6 billion, she said.

The recent market tumult shows how inflation has made a liability out of good news, such as wage gains and a strengthening economy, since it could prompt the Federal Reserve to accelerate interest-rate increases. The prospect of rising rates has weakened a key justification for the sky-high corporate valuations, and has made stocks less appealing by offering higher returns on risk-free savings.

Inflation fears got an added jolt this week as oil prices rose to a three-year high and the yield on the 10-year U.S. Treasury note topped 3% for the first time since 2014.

“A lot of investors are really primed to see inflation coming in, and that freaks them out,” said Megan Greene, chief economist at Manulife Asset Management. It is the biggest concern she hears from the firm’s clients.

Rising volatility also has made investors skittish as markets have been whipsawed by the threat of a trade war, political upheaval and a technology-stock rout. After spending most of 2017 near historic lows, the Cboe Volatility Index, a measure of traders’ expectations for market moves, has risen 50% since the start of the year, according to FactSet.

Some say investors may be overreacting to headlines, ignoring the health of the U.S. economy and the strength of corporate earnings, when there is little to suggest that a recession is near.

“People overly focus on news flow, like trade concerns or geopolitical issues,” said Jonathan Golub, chief U.S. equity strategist for Credit Suisse AG. “As long as the economy stays away from a recession, stocks are way more likely to surprise to the upside.”

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