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Market Wrap-up for May 6 - Investors Pull Out of U.S. Equities

2015 has not exactly been a banner year for stocks, but most major benchmarks were able to squeeze out a gain for the first quarter of the year. Despite the six-year (and change) bull run marching on, investors have shown signs of losing confidence in U.S. equities.

In April of this year, a total of $35.8 billion in assets were pulled from U.S. equity ETFs and mutual funds; the highest that figure has been since October of 2008. Right away the latter date invites recession comparisons and cries for a global meltdown, but the situation is hardly as dire as some headlines make it seem.

What this Move Means

The Bad News

Let’s start off with the bad news and what this could possibly be signalling as far as the overall market is concerned. Obviously, one never wants to see investors lose faith in their home market as it signals a lack of confidence in the economy. Last week’s GDP figures did little to help that notion (though many are expecting it to jump for Q2). It also suggests that the general investing community feels that markets are sitting in overbought territory.

As mentioned above, some will be quick to hone in on the October 2008 date and worry about a coming recession, though that would be far overdone.

The Good News

To be perfectly blunt, the broad market is awful at calling trends ahead of time; rather, it’s usually late to the party. The S&P 500 had already dipped 30% from its high by October of 2008 before investors began to flee equities in full force. The wide market predicting an ensuing crash seems rather far fetched (and rarely, if ever, does it occur). Thus the good news (somewhat in disguise) is the mere fact that the herd is poorly equipped to predict market trends.

The exodus from equity products also means that choppy markets have shaken out some of the more skittish investors. Boris Schlossberg of BK Asset Management had this to say: “I actually think it could be a positive for U.S. stocks, because the more people are fleeing equities, the less likely we are to have a crash instantaneously. It’s only when we have bubble-kind-of-conditions that leads to very sharp corrections in equities.” Shaking nervous investors out of markets helps to ensure that any kind of possible correction will be much more muted, just as Schlossberg noted.

Finally, it’s not as if investors are pulling from U.S. equities and hoarding cash. Many have simply moved their funds to overseas equities, which is a good reminder for all investors to consider stocks and funds outside their home country.

The Bottom Line

The move from U.S. equities may seem like a scary trend at first, but when you take a look at the whole picture, the situation is not nearly as dire as it appears on the surface.

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