S&P 500 And The Financial Accounts Of The United States: Goldman Sachs


Recently, the Federal Reserve released its latest Financial Accounts of the United States report previously known as the Flow of Funds Accounts. The Fed’s Z-1 release analyzed $28 trillion of corporate equity assets including $18 trillion of domestic public corporate equity at the end of 1Q 2013. Public US equities have climbed 3% in the second quarter so far, adding $600 billion in market value.

Financial Accounts

Take Aways On US Financial Accounts

Our three major takeaways: (1) Corporations are the largest source of demand for stocks; (2) US investors purchased foreign equity while foreign investors sold US equity; and (3) Mutual fund demand for US equity is lower than the Flow of Funds suggests. First, investor flows into mutual funds favor international equities. Second, equity purchases by mutual funds lagged investor flows into mutual funds causing the liquidity ratio to rise.

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Net issuance for the corporate equity market totaled $61 billion, the first net issuance since 2010. While corporations repurchased $69 billion of stock, credit and equity ETF issuance totaled $52 billion, and US investors purchased $74 billion of foreign equity. Equity purchasers included mutual funds ($39 bn), equity ETFs ($45 bn), and Households ($44 bn). Foreign investors ($43 bn) and broker dealers ($24 bn) were sellers.

1. Corporate equity purchases remained the dominant source of share demand. Corporations purchased $69 billion of US equity through buybacks and cash M&A (net of share issuance). Notable large repurchases from S&P 500 companies include T ($6 bn), XOM ($6 bn), and PFE ($5 bn). We forecast corporations will repurchase roughly $450 billion of net equity in 2013, above the 1Q annualized rate of $278 billion.

Households were not a source of outflows this quarter. Flows from the Household sector equal the remainder of net issuance less net purchases from all other categories. So, as corporations purchase equity, Households typically sell equity. Households include retail investors, domestic hedge funds, private equity funds, endowments, and other unclassified investors.

2. Investors continue to favor international equity despite strong domestic performance year-to-date. The US has been one of the best performing equity markets in 2013, surging 10% in 1Q and 14% YTD. Yet US investors purchased $74 billion of foreign equity, the second largest quarterly purchase in the history of the series. TIC data indicates investors favored equity from the United Kingdom and Japan.

Most foreign equity was purchased through global equity mutual funds and ETFs. We estimate global mutual funds accounted for half of international stock purchases ($35 bn). ETFs represented an additional quarter of foreign equity purchases ($19 bn).

Foreign investors provided the major source of US equity supply with outflows totaling $43 billion, but investment in mutual funds and money market mutual funds increased. International investors own 12% of the US corporate equity market, near the historical high.

(3) Mutual fund demand for US equity is lower than the Flow of Funds suggests. Many market participants misunderstand mutual fund flow data. First, mutual fund purchases of equity include domestic and international
stocks. Second, mutual fund PURCHASES of equities are not the same as investor FLOWS into equity mutual funds.

Mutual funds bought $39 billion of corporate equities in 1Q 2013, the first net purchase of equity since 2Q 2011. The $156 billion of annualized inflows exceeds our 2013 full-year forecast of $125 billion. Purchases heavily favored foreign stocks. Using ICI data, global equity funds accounted for 90% of net purchases.

Inflows into equity mutual funds ($67 billion) outpaced equity purchases by mutual funds ($39 billion). As a result, the liquidity ratio rose to 3.7% from 3.3% during 1Q 2013. At the end of 1Q, equity funds held $6.5 trillion of assets including $240 billion in liquid assets, $4.6 trillion of domestic equity and $1.6 trillion of international equity. If liquidity ratios decline, equity demand would increase. Holding assets constant, a 10 bp decrease in the liquidity ratio would equate to about $650 million of equity purchases with domestic equity purchases totaling about $460 million.

Unlike mutual funds, ETF purchases favored domestic equity. Equity ETF issuance totaled $45 billion 1Q 2013. Inflows into domestic equity ETFs totaled $26 billion (59%) versus $19 billion (41%) to global ETFs. We forecast 2013 inflows of $75 billion, below the annualized rate of $180 billion.

April data indicates mutual fund and ETF trends continued in early 2Q. Equity mutual fund and hybrid fund inflows totaled $16 billion during April. These funds purchased $12 billion of equity causing a slight increase to liquidity ratios. Stock purchases included $5 billion by global equity funds. US equity ETFs inflows totaled $1.1 billion during April. International ETF inflows were similar in magnitude totaling $1.3 billion.

The Financial Accounts of the United States