Mutual fund, futures, and ETF data reveal a shift away from stocks and towards bonds during the past month, thanks to current high valuations in equity market points out Goldman Sachs report.
David J. Kostin and team at Goldman Sachs in their June 6, 2014 report titled: “US Weekly Kickstart” point out pension funds have sold stocks and bought bonds in the first quarter.
Goldman Sachs: Weakening equity flows
The Goldman Sachs analysts point out U.S. equity flows have weakened during the past month, with outflows from U.S. equity mutual funds totaling $10 billion since April 30. The following graph highlights the negative flows experienced by domestic equity mutual funds in May:
The analysts note during the past five weeks, $12 billion was withdrawn from ICI domestic equity mutual funds, while $7 billion moved into international equity and $11 billion flowed into taxable bond funds. The old saw sell in May and go away might be a good rhyme, but it was a money loser in this case. The S&P 500 (INDEXSP:.INX) was up approximately 2% in May, however, there is a saving grace for some investors.
The analysts note small-cap funds have experienced the largest outflows consistent with Russell 2000 lagging the S&P 500 by 625 bp YTD.
Rotation index at low level
The Goldman Sachs analysts note recent flows suggest a modest preference for equity allocation, but less risk appetite than during the past year or compared with previous bull markets. The analysts point out the combination of fund flows has pushed their Rotation Index to its lowest level since June of last year:
The analysts point out that institutional investors have also trimmed exposure to U.S. equities. As can be deduced from the following graph, net equity futures positions of Institutional and Levered Funds have declined to $68 billion at the end of May from $92 billion at the start of April.
Turning their focus towards valuation, the Goldman Sachs analysts note top-down, S&P 500 (INDEXSP:.INX) forward NTM P/E is 16.2x, while bottom-up, NTM P/E equals 15.9x and LTM P/B equals 2.7x. The following highlights the valuation metrics:
The analysts point out that the S&P 500 (INDEXSP:.INX) was up 1.1% this week, with utilities the best-performing sector with a gain of 1.9%, while telecom services was the worst-performing sector losing 0.8%. The analysts anticipate the S&P 500 will likely trade at 1950 over the next 12 months, showing a gain of 0.5%. The following table sets forth S&P 500 sector and industry group performance: