Equity Fund Outflows Plummet: Mere Blip or a Real Warning?

Our friend Jim Colquitt, in his Weekly Chart Review, brought to our attention a large and irregular outflow from equity funds last week. He cites a Reuters article stating that investors withdrew $43 billion from US equity funds last week. That was the largest outflow since December 2024.

The graph below shows that equity fund flows were flat to slightly negative over the prior three weeks before last week’s large outflow.

Jim sums up the dilemma of this information well:

The article would suggest that investors are moving out of risk assets and towards safer assets (i.e., bonds).

Is this part of a bigger plan to de-risk, or is this just the normal course of business as we get towards quarter-end? Honest answer, I don’t know the answer.

Fund outflows are important to consider, given the increasingly dominant role that passive investing has on the market. To wit, equity fund flows generally increase week to week as new 401k money gets invested into equity funds. This steady increase has been a source of growth for the markets.

While it has been dependable, there is a school of thought that thinks it will reverse due to demographics. Simply, as the baby boomers age, they will become more dependent on their retirement savings and be forced to withdraw funds. Given the size of the baby boomer cohort versus younger generations, a persistent outflow from passive funds could become the norm.

A week or two of negative flows is meaningless. For now, we will deem the equity fund outflow last week as a blip versus a warning. However, if equity fund flows continually trend negatively, that represents a change in market dynamics worth paying attention to.

Consumer Staples Are Getting Left Behind

Over the last four weeks of trading, the Consumer Staples ETF, XLP, has declined by over 8%. That compares to the S&P 500, which is up nearly 3% and its two leading sectors, communications (+4.5%) and technology (+3.5%). Utilities, healthcare, and real estate are also significantly lagging the market over the 20-trading period, indicating that investors are shunning conservative stocks in favor of market leaders.

The first graphic shows that Walmart (NYSE:WMT) is the only top ten consumer staple stock that has risen over the last 20 days. And that is by a mere 0.03%! Moreover, three well-known companies —Philip Morris (NYSE:PM), Coca-Cola (NYSE:KO), and Colgate-Palmolive (NYSE:CL) — are down by over 10%. The second graphic shows that staples are the only sector with a negative absolute score. Additionally, at -.77, it has a very oversold relative score.

The graph on the right shows that the staples sector is more oversold than the other conservative sectors, and is positioned at the opposite end of the grid as the high-flying technology and communications sectors. Timing is tough, but we should expect a rotation from overbought sectors to staples and some of the other oversold sectors. This is likely to occur during a market correction.

Tweet of the Day

Original Post