US Equity Outflows vs Bonds and Cash Surge to Highest Gap Since 2008 | 2019 Market Analysis
Explore the 2019 trend of massive net outflows from U.S. equities, the largest gap since 2008, and what it means for investors as they shift towards bonds and cash amid economic uncertainties.
In 2019, the U.S. financial markets are experiencing a significant shift, with equity outflows widening dramatically compared to bonds and cash holdings—the largest disparity seen since the 2008 financial crisis. This shift comes as the Federal Reserve contemplates further interest rate cuts to support the economy and stabilize markets trading near historic highs. According to Goldman Sachs’ latest US Weekly Kickstart report, the gap between equity fund flows and bond and cash funds over the past 12 months has reached unprecedented levels.
Goldman Sachs highlights that 2019 is on track to witness the second-largest net outflows from U.S. equities in 15 years. Factors driving this trend include slowing U.S. economic growth, ongoing trade and geopolitical uncertainties, and historically high equity allocations at the start of the year. Despite the S&P 500 nearing its record highs, investor appetite for risk has notably diminished compared to last year.
Implications for Investors
Year-to-date through October 24, 2019, U.S.-based equity mutual funds and ETFs have collectively seen around $100 billion in net outflows. The most affected are actively managed U.S. equity mutual funds, which experienced net outflows totaling $217 billion. Conversely, passive equity funds have attracted $117 billion in net inflows, partially offsetting the losses from active funds.
Key Insights
- Investors are increasingly moving away from U.S. equity funds toward bonds and cash.
- Equity allocations remain near historic highs despite outflows.
- Actively managed equity funds face the largest withdrawals.
- Passive equity funds continue to draw investor interest.
Meanwhile, bond funds have accumulated an additional $353 billion in net assets, and cash funds have received $436 billion in new investments. Goldman Sachs notes that this rotation from equities to cash may continue, considering historical allocation trends.
From a historical standpoint, the shift is moderate. The proportion of equities in investor portfolios has decreased slightly from 46% a year ago to 44% currently, placing it in the 81st percentile since 1990. Bond allocations have risen from 24% to 26%, ranking in the 50th percentile, while cash holdings stand at 12%, which is still relatively low historically (5th percentile).
Goldman Sachs also observes increased cash allocations across all major investor categories over the past year, including households, mutual funds, pension funds, and foreign investors—groups that collectively represent 84% of the equity market.
Despite these shifts, Goldman concludes that overall equity exposure is not extreme and anticipates relatively stable equity allocations throughout 2020. They forecast net stock purchases from corporations, households, foreign investors, and ETFs, while mutual funds and pension funds are expected to be net sellers.
Corporate share repurchases, a key driver of the decade-long bull market, are projected to decline by 2% to $470 billion in 2020 due to reduced corporate cash reserves, slower earnings growth, and increased political scrutiny.
Market Outlook
The S&P 500 has surged 21% in 2019, primarily during the first four months, but has since traded within a narrow range. As of October 25, the index was only 5.2% above its intraday peak from January 26, 2018, and has gone 64 trading days without a new record high—the fifth-longest such period in five years.
Experts caution that the market remains vulnerable to setbacks, especially given the fragile nature of current trade agreements. Meghan Shue, Chief Investment Strategist at Wilmington Trust, warns that any negative developments could push markets lower. Adam Phillips, Director of Portfolio Strategy at EP Wealth Advisors, emphasizes that progress on trade negotiations is essential to restore business confidence and stimulate capital expenditures.
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