Positive Investor Equity Sentiment Has Not Translated To Overly Positive Equity Flows

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 |  Includes: AGG, DIA, MUB, QQQ, SPY, TLT
by: David I. Templeton, CFA

One chart we have shared recently with our clients during our portfolio reviews with them is the chart of the S&P 500 Index overlayed with equity mutual fund flows. The strength of the market's advance since 2009 would seem to suggest investors have jumped head first into stocks. Additionally, a number of recent market reports have opined on the elevated sentiment levels (here and here). High bullish sentiment has tended to be one technical indicator suggesting a market top may be near. However, as the below chart shows, flows into equity funds have just recently turned positive.

From The Blog of HORAN Capital Advisors
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Maybe more importantly, flows out of fixed income investments have only been occurring for the last five months as noted in the first chart below. In the second chart below, cumulative flows are shown beginning in 2009. The cumulative flow chart shows investors continue to have a large amount of their investments in fixed income investments based on the flows contributed to fixed investments since 2009.

From The Blog of HORAN Capital Advisors
Click to enlarge
From The Blog of HORAN Capital Advisors
Click to enlarge

One question that comes to mind is what event causes investors to reduce their fixed investments. One such event may begin to unfold as investors open their account statements at the end of the year and see the magnitude of the decline in the value of the fixed portion of their account. As the below chart shows, the 10 year Treasury yield has increased from 1.63% to 2.88% from May 2nd to December 6th. Although the absolute level of the 10 year Treasury yield does not seem high, the negative impact on the value of fixed income investments has been significant. The iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) has declined 17% during this period of rising interest rates.

From The Blog of HORAN Capital Advisors
Click to enlarge

So, although some of the sentiment indicators may be elevated, based on the amount of flows into bonds since 2009, more reallocation from fixed to equity can occur in the foreseeable future and be supportive of higher equity prices. Certainly economic and company fundamentals will need to be favorable as well.