After the carnage in the stock markets — it was the worst start of the year ever for U.S. stock markets — a look at capital flows can give some clues on where the markets might be headed next.
Demand indicators analysed by Trim Tabs Investment Research “have turned significantly less negative for the short term (one to two weeks)” and “continue to be bullish for the intermediate term (one to two months).”
U.S. equity ETFs saw 0.7% of assets, or some$8.1 billion, leaving in the past week, their biggest outflows since early September. “While these redemptions are encouraging, they are hardly indicative of panic, and the trailing one-month inflow is still more than double the one-month average,” the analysts at Trim Tabs said.
They are usually looking for contrarian signals to see when sentiment in the markets could turn. Another contrarian indicator, the Bank of America Merrill Lynch bull/bear index, last week showed an extremely bearish reading, which is usually associated with a “buy” signal.
The Bank of America Merrill Lynch Global Breadth Rule also triggered a contrarian “buy” signal, with 88% of global equity markets trading below their 200-day moving averages and their 50-day moving averages.
If markets had their worst start to the year, for new deals it was just the opposite. A total of $4.3 billion was raised in 17 deals in the past week, the highest number of deals ever in the first week of the year. But this does not necessarily bode well; mergers and acquisitions usually heat up in the late stages of the economic cycle.
“We are concerned about how quickly new offerings ramped up after New Year’s,” the analysts at Trim Tabs wrote. “The quick pickup in selling is not a good sign for what lies ahead in 2016 as corporate credit conditions tighten.”
Looking at the weekly capital flows data analysed by Bank of America Merrill Lynch, emerging markets, which in the past took the brunt of outflows, saw “very modest” redemptions of half a billion dollars in the week that ended on January 6.
European stocks saw $1.3 billion in inflows; the asset class saw inflows in 32 of the past 34 weeks. Japanese equities also saw inflows, worth $900 million.
Total outflows from U.S. equities were the largest in 17 weeks, with $12 billion in redemptions from ETFs and mutual funds in the week that ended on January 6. It looks like investors are taking shelter from the Fed elsewhere, mainly in Europe and Japan, where money printing continues.
U.S. nonfarm payrolls increased more than expected in December, by 292,000, seeming to vindicate the decision by the Federal Reserve to raise interest rates for the first time in nearly a decade; but not everybody believes the figures.
“For the third consecutive month, the Bureau of Labor Statistics (BLS) grossly overestimated employment growth,” said the analysts at Trim Tabs Investment Research.
Based on real-time income tax withholdings, they estimated that the economy added between 120,000 and 150,000 in December, the lowest growth in employment in almost two years.
“If employment growth last month was as strong as the BLS currently estimates — the BLS figures are subject to huge revisions long after their initial release — then where was all the wage and salary income from these new jobs?”
Ultimately, the Fed is data dependent and any future moves on interest rates hinge on how bad the data turn out to be. It’s possible that investors may again look to bad economic news as good news for the stock markets, since it would delay or possibly even reverse monetary tightening by the Fed.