Investors poured $5.4 billion into US-based stock funds during the latest week, showing more optimism about equities than bonds for the fourth straight week ahead of a possible rate hike and the guarantee of a new guard in Washington. Domestic stock funds took in nearly $3 billion during the week through Dec 7, while global stock funds added $2.4 billion in their best weekly sales result since March, according to the Investment Company Institute trade group.
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“Investor sentiment for US equities to climb higher remains strong as the stock market remains at or near record levels and with strong 2017 earnings expectations,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. “With a projected Fed hike today and more to come in 2017, investors have rotated to equities.”
Projections of government spending under a new Donald Trump presidential administration have lifted stocks but sparked fears of bond-harming inflation, and of a “great rotation” from bonds to stocks. The president-elect takes office next month.
The US Federal Reserve is also widely expected to hike rates after a policy meeting Wednesday, a move that could also hurt bond prices.
Bond funds, which have seen losses in recent weeks, posted about $250 million in outflows during the week.
Investors have now pulled money from municipal bonds for six straight weeks, which another $4.4 billion in the latest week, and from commodity funds for four straight weeks.
Those funds, which include those that buy gold, posted $1.7 billion in withdrawals. Gold is highly sensitive to higher rates, which raise the opportunity cost of holding non-yielding assets, while boosting the dollar, in which the metal is priced.
Yet there were signs that the “great rotation” trend is fading.
The positive result for stocks, for instance, was exclusively due to a massive $12.7 billion move into stock ETFs, which helped counteract investors’ continuing to pull cash from mutual funds.
Equity mutual funds posted $7.4 billion in withdrawals.
Mutual funds with active managers have notched lackluster performance against relatively low-cost index funds and ETFs that track the market.
Meanwhile, bond funds showed signs of resilience. Taxable-bond funds took in $4.1 billion in the seven days through Dec 7, the most money since October, as investors bought floating-rate and high-yield corporate bonds that tend to hold up better when rates rise. The following table shows estimated ICI flows, including ETFs