Monday, April 30, 2018

Strong Earnings Face Continued Concerns

Monday, April 30, 2018 - Following a familiar pattern, stocks were whipsawed last week by the competing forces of optimism stemming from robust earnings and corporate fundamentals and the unease from rising interest rates and the specter of peaking economic growth. Stocks stumbled to begin the week, buffeted by a selloff in government bonds that pushed the 10 year treasury yield above the important psychological barrier of 3% for the first time since January 2014. The markets were further battered after industrial bellwether Caterpillar's warning that its first quarter results could represent a "high-water mark" for the year. By mid-week, market sentiment began to flag as concerns about cooling economic growth mounted.

It took strong performances from several technology blue chips to stem losses for the week. A slew of record setting revenue and profits reported by the likes of tech giants Facebook, Microsoft and Amazon were the latest affirmation of the health of the global economy. All told, more than half of the S&P 500 companies have posted first quarter results and the index is on track to record year-over-year earnings growth of 23%.

However, signs that corporate earnings remain on solid footing and geopolitical tensions are easing were unable to surmount fears that inflation and borrowing costs will continue their ascent and stock gains could stall. This murky outlook helped contribute to declines in the major indexes for the week and will likely fuel continued volatility. As of Friday's close, the DJIA, S&P 500 and Nasdaq were down 0.6%, 0.1% and 0.4% for the week.

ETFG Fund Flow Summary - Fund flow activity often reveals a telling picture of investor sentiment. Our fund flow analytics and data feed allow you to capture market sentiment and analyze flow trends from a broad, macro perspective - asset class, geography and region, development level, product structure and factor exposures - down to more targeted, granular groups - individual issuers, ETPs and underlying constituents.

Despite the gyrations of this week's market action, U.S. listed ETPs managed to attract $972 million of inflows, showing ETPs remain popular vehicles of choice amid calm or turbulent market conditions alike. The nearly $1 billion in fresh inflows pushed up total year-to-date inflows to $81.5 billion.

At the asset class level, equity based products suffered $3.2 billion in outflows amid the choppy market activity wherein optimism from robust corporate earnings was tempered by lingering concerns about interest rates, trade tensions and stalling growth. Unsurprisingly, this skittishness drove investors to safe haven products, with domestic fixed income products receiving the largest inflows as a group with over $2.6 billion. Other notable flows include $439 million to commodities, against a continued rise in energy prices and unexpectedly, $1.8 billion into international equity products.

Despite the outflows suffered as a group, there were several notable domestic equity ETFs that received sizable inflows and were among the top 10 ETFs in creations for the week. The iShares Core S&P 500 ETF (IVV) led all ETFs in creations with $1.9 billion, followed by the iShares Core MSCI EAFE ETF (IEFA), iShares 20+ Year Treasury Bond ETF (TLT), iShares Core Aggregate Bond ETF (AGG), and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), with $1.3 billion, $828.3, $604.6, and $575.1 million respectively. The Financial Select Sector SDPR Fund (XLF) and Consumer Staples Select Sector Fund (XLP) also stood out, finishing the week 7th and 8th in inflows with $429.4 and $423.4 million, as they received boost from positive sector earnings performances.

Outflow trends this week perfectly capture the current quandary investors find themselves in. Despite the stellar earnings results and long-running market leadership provided by the technology sector and ostensibly bright outlook for small caps following this year's tax cuts, funds in these groups dominated this week's top 10 outflow leaders. Powershares QQQ Trust (QQQ) led the way with nearly $2 billion in outflows, followed by SPDR S&P 500 ETF Trust (SPY), iShares Russell 2000 ETF (IWM), iShares iBoxx $ High Yield Corporate Bond ETF (HYG), and Technology Select Sector SPDR Fund (XLK) with $1.8 billion, $1.1 billion, $682.4 million, and $616.2 million in outflows.

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