Stimulus package could bring investors back into the markets

The stock market roller coaster in the midst of the COVID-19 pandemic continues to test the mettle of financial advisers and long-term investors.

Data through the end of February, when fears related to the virus were gaining traction in the United States and the S&P 500 Index had dropped 9.3% from the start of the year, show investors were still buying equity and bond funds.

According to Cerulli Associates, while more than $775 billion in assets were being wiped out of mutual fund strategies in February, investors added $15.2 billion in net flows into active and passive strategies.

Then came March and a much more dire outlook for the economy and the financial markets related to the fast-spreading coronavirus.

According to the Investment Company Institute, for the week ending March 18, investors pulled $135 billion from stock and bond funds, which compared to $27.9 billion worth of net outflows during the prior week ending March 11.

While the S&P had only declined 1.9% between the end of February and March 18, the decline from the start of the year was in full bear market territory at 26.4%.

The S&P’s most recent low was on March 23, when it registered a 31.3% decline from the start of the year. But it has since rallied more than 14% off that bottom, including a strong rally so far this week, through mid-day trading Friday, March 27.

While the ICI hasn't yet reported long-term fund flows through March 25, the growth of money market assets suggests investors are still pulling away from the markets.

ICI data show money market assets topping $4.2 trillion as of March 25, which is up from $3.9 trillion a week earlier, and $3.7 trillion on March 11.

With the $2 trillion government stimulus package finally making its way through Congress, it might be too soon to tell how much of an impact that could or is having an investor behavior.

One thing that is clear is the bullishness that helped investors weather the various market pullbacks during the historic 11-year bull market is now being tested.

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, cited the outflows from bond funds, especially municipal bond funds, as the latest example of “extreme pessimism.”

According to ICI, bond funds had $11 billion in net inflows during the week ending Feb. 19, and another $2.1 billion during the week ending Feb. 26.

The next three weeks saw bond fund net outflows top $149 billion, including $92.7 billion in net outflows during the week ending March 18.

Muni bond funds contributed $22.5 billion to the total bond fund outflows, including $19 billion during the week ending March 18.

“Muni funds are very retail products that investors almost never sell,” said Rosenbluth. “Those funds are starting to show losses, especially if they’re taking on some credit risk.”