Investors Flee Stock Funds, Bond Funds Benefit, Recession and Inflation Watch


By the Curmudgeon  

Stock Outflows, Bond Inflows:

Despite a super strong stock market in January, investors have been net sellers of equity funds in 2023.  There’s been a net outflow of $31 billion from U.S. equity mutual funds and exchange-traded funds (ETFs) in the past six weeks, according to Refinitiv Lipper data through February 8th.  That marks the longest streak of weekly net outflows since last summer and the most money pulled in aggregate from domestic equity funds to start a year since 2016.

The Investment Company Institute (ICI) reported that equity funds had estimated outflows of $12.65 billion for the week ended February 1st, compared to estimated outflows of $4.27 billion in the previous week. Domestic equity funds had estimated outflows of $9.08 billion.  World equity funds had estimated outflows of $3.56 billion were $3.76 billion for the week.

Meanwhile, bond funds have been winners this year.  The ICI said that bond funds had estimated inflows of $9.73 billion for the week, compared to estimated inflows of $7.51 billion during the previous week. Taxable bond funds saw estimated inflows of $8.26 billion and municipal bond funds had estimated inflows of $1.47 billion.  Lipper data shows that for 2023, a net $24 billion has been invested in taxable bond funds and nearly $3 billion into municipal bond funds.

Behind the Numbers:

The exodus from U.S. stock funds underscores the divergence between investors skeptical of the market’s year-to-date rise and those eager to ride the wave higher. Some investors are putting money into ultra-safe fixed-income assets and choosing funds of cheaper stocks abroad.

“The sense of opportunity certainly lies elsewhere,” Cameron Brandt, director of research at fund-flow and allocation data provider EPFR, said of U.S. equity funds.  “It’s definitely a sign that markets are still cautious, certainly for a segment of the investing public,” Mr. Brandt added.

Among individual investors, net purchases of single stocks have climbed since the start of the year, while net buying of ETFs has stagnated, according to Vanda Research data.  

Bank of America clients have made net purchases of more than $15 billion in single stocks year to date, while ETFs have seen more than $10 billion of net outflows.  The preference toward individual stocks reflects a more supportive backdrop for active management, according to Jill Carey Hall, U.S. equity strategist at Bank of America.

Emerging market and Europe-focused equity exchange traded funds both enjoyed their highest monthly net inflows for a year, according to Blackrock.  Investors put $7.3bn into ETFs focused on European equity — predominantly from the U.S. — the highest figure since January 2022, according to the BlackRock data.

Emerging market ETFs were even more popular, attracting a net $15.9bn, again a 12-month high, with buying led by funds listed in the U.S. ($9bn) and the EMEA region ($5.3bn).

Estimated Flows* to Long-Term Mutual Funds
Millions of dollars  (ICI)







Total equity
























Total bond
























The Case for Bonds:

Higher interest rates have led some investors to add to their bond funds, as fixed-income assets offer the highest yields in more than a decade with minimal risk. The yield on the Bloomberg U.S. Aggregate Bond Index is 4.5%, outpacing the 1.7% dividend yield on the S&P 500.  Others, like the Curmudgeon have been buying 3-, 6-, and 12-month T-bills which all yield over 4% with no state income tax.

As the inflation rate moderates, PIMCO argues that “bonds are back” in this video interview.  Higher yields (above the 20-year average) and lower volatility make a strong case for buying bonds now, according to PIMCO portfolio manager Tony Crescenzi.

Global Recession Watch:

The nearly widespread view that most of the world will be in a recession this year argues that inflation rates are expected to decrease.  That’s illustrated in this chart from Fidelity:


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What to Expect in the January CPI Report:

The consumer price index (CPI) report for January will be released February 14th.  Annual inflation has been falling over the past several months from its peak of above 9% in June to 6.5% in December.

Economists polled by the Wall Street Journal forecast a 0.4% increase in the January CPI, which would slow the year-over-year rate to 6.2% from 6.5% in December. Year-over-year CPI peaked at a roughly 40-year high of 9.1% last summer. Core CPI, which excludes volatile food and energy prices, is expected to rise 0.3% in January, with the year-over-year rate at 5.4% versus 5.7% in December.

The January CPI report will see the Bureau of Labor Statistics (BLS) introduce new weightings for its calculation of the CPI for the coming year. For this year, the bureau has changed its methodology from using consumption data during a two-year period to only one year to weight the CPI components.

As a result, the 2023 CPI reports will be only based on expenditure data in 2021, when the spending was more heavily weighted toward goods consumption instead of services, according to Richard de Chazal, macro analyst at William Blair.  The January inflation data will also be weighted more towards goods expenditures, which had been moderating, de Chazal wrote in a Friday note to clients.

The Owner’s Equivalent Rent calculation will also change. The BLS wrote:

“Beginning with January 2023 data, BLS plans to adjust the weighting method for Owner’s Equivalent Rent (OER) in the CPI. The new method will use neighborhood level information on housing structure types to weight OER’s unit sample observations.  BLS will continue to sample and weight housing units to be geographically representative.  In some neighborhoods, detached houses are underrepresented in survey responses so additional unit weight will be given to underrepresented detached houses in the OER index sample.”

OER accelerated from November to December.  Michael J. Kramer of Mott Capital Management wrote, “OER is likely to continue to drive prices higher for some time, while the impact of declining used car prices will be less pronounced.”  That could keep the Fed in tightening mode for longer than most investors expect. 

Others, like Victor, believe the Biden administration encouraged the BLS to recalculate the CPI in order to make it lower than it otherwise would be.  Victor wrote in a previous post:

“As the decline in the CPI is not happening fast enough for the government’s liking, the BLS will artificially lower the CPI by changing the way its calculated!  I believe this will occur in the coming months and will lower the CPI to 2 to 3% annually.”

Hopefully, the release of the January 2023 CPI numbers (nominal and core rates) will not shock the markets.

Cartoon of the Week:


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Be well, stay healthy, warm, and dry. Till next time…...

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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