Don't believe anyone who says "everyone is bullish" on the U.S. stock market. Investors pulled -$1.2 billion out of U.S. equity mutual funds last week. This marked a record-setting 99th straight week of outflows. Everyone isn't bullish. In real dollars, that amounted to a massive -$428 billion that's left domestic equity mutual funds over that period.
There's a silver lining to all this that suggests this trend could flip. That would be bullish for equities.
Active Versus Passive Management
#ETF #MutualFund $SPY
To be sure, this bleak picture is a bit one sided. The $3 trillion-plus exchange-traded fund (ETF) industry has been a massive catalyst for mutual fund outflows. ETFs seek to mirror a broader index, like the SPDR S&P 500 Trust (SPY) mimics the S&P 500. This is called passive management since ETFs try to mirror the benchmark.
Conversely, mutual funds are active management since managers "actively" try to beat their benchmark. Just 19% of large-cap mutual funds beat their benchmark in 2016, so why pay an annual fee that's 60 basis points higher.
Still, the outflows from mutual funds weren't outweighed by ETF inflows. In 2016, cumulative weekly flows to domestic equity mutual funds and ETFs was -$2.5 billion. In the past year, weekly average net equity flows (equity inflows minus outflows) totaled -$5.7 billion. An optimist would point to the black trend line in the chart below and say it's improving. We'll see...
Bottom Line
"I have no idea how one could characterize that as 'bubbly' or 'overly bullish' from a US stock market sentiment perspective," writes Hedgeye CEO Keith McCullough in this morning's Early Look.
So again, everyone isn't bullish. This actually bodes well for our market call. If the U.S. economy is indeed accelerating, as we've been arguing, you'd start to see inflows to U.S. equities that push stocks higher.
Time will tell, of course.
