Chart of the week

Record equity inflows continue amid mixed fundamentals

Stock inflows reach a new record; are they divorced from fundamentals? This week’s chart asks if investors should reevaluate equity risk.

January 29, 2021 | 2 minute read

U.S.-listed equity ETF flows vs. S&P 500

Source: Bloomberg Finance, L.P., as of January 27, 2021.

  • After racing out of the gates to start the year, markets took a breather this week. The S&P 500 saw its MTD return wiped out on Wednesday amid significant volatility. Despite the sudden shift, the S&P is still up more than 65% from its March 2020 low as investors remain optimistic about a vaccine-led economic bounce in the second half of 2021.
  • As the stock market’s momentum accelerated in Q4 2020, however, it seemed increasingly divorced from fundamentals. In mid-January, for instance, the S&P 500 raced to a new high but did so amid increasing concerns surrounding valuations.
  • Market activity this week – in particular, the massive jump in certain small-cap stocks driven by individual traders – threw the recent divergence between stocks and fundamentals into even more stark relief.
  • The chart compares the S&P 500’s performance to domestic ETF inflows since 2014. As it highlights, the stock market’s spike since late Q4 2020 has been supported by an unprecedented level of inflows. Despite recent signs of softening economic data, 3-month cumulative inflows into equity ETFs are set to far outpace that of any other period, at approximately $170 billion.1
  • The volume of U.S. equity call options, which can be read as another measure of positive investor sentiment, has also remained near record highs in January.1
  • Investor optimism may in fact be well grounded as many analysts have forecast a strong year for stocks.2 Amid historically high inflows (not to mention this year’s jump in options volume), however, investors of all kinds would be wise to remain conscious of market fundamentals. 

  • Bloomberg Finance, L.P., as of January 27, 2021. Call options allow an investor to purchase a stock at a certain price until a defined expiration date.

  • Marketwatch,

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