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Investors Lose Faith in S&P 500 as They Pull Off 17 Billion Ahead of a Selloff

In the last year, the Standard & Poor 500 Index boasted over 50 record closes but this has not been enough to hold investors’ interest for long.

Investors Lose Faith in S&P 500 as They Pull Off 17 Billion Ahead of a Selloff

So far, investors have pulled out $16.8 billion from American equity funds and diverted up to $16.9 billion to bonds, the largest divergence since 2000.

Stocks have just started to perform well as Nasdaq Composite Index shot above 5,000 and shares are steadily recovering from the worst loss in a year. However, the S&p 500 is facing volatility, which has sent the index to a steady decline since January.

As the Federal Reserve prepares to raise interest rates and equity valuations increase to a five-year high for nine consecutive quarters, traders are starting to rethink their investment in the S&P 500 index in which they put over $240 billion in equity trades.

Karyn Cavanaugh, a senior market strategist at Voya Investment Management LLC in New York said, “Investors usually get quite nervous when we reach the thresholds. People could be taking some of their gains off the table with the anticipation that the rest of the year might not be too good, especially if the Fed hikes rates in June.”

On March 4, the S&P 500 declined for a second consecutive day, falling by 0.9 % from an all-time high as traders looked to data on the services and job market for an indication of a hike in interest rates. Last month, the index rallied by 5.5%, a rebound from a 3.1% loss recorded in January.


Performance in the Global Markets

In February this year, the S&P 500 increased to new all-time highs four times. However, a gain of 1.9% still lags behind 22 out of 24 developed markets. Global equities have witnessed significant rallies due to favorable central bank policies in Japan and Europe. The U.S. bond market is also quite attractive even though the Fed bond-buying program has ended.

Presently, the S&P 500 is trading at 18.7 times earnings, which is close to the highest level in 2010, in contrast to 17.5 for the MSCI All-Country World Index. This follows a six-year bull run facilitated by the Fed stimulus in which the value of the index tripled while corporate profits doubled.

The consecutive profit decline since 2009 can be attributed to an increasingly strong dollar. Members of the S&P 500 will see their income reduce by at least 3.2% in the current quarter and in the one that follows.

According to Peter Sorrentino, a Huntington Asset Advisors fund manager in Cincinnati, “There is an availability of cheaper assets elsewhere and there is plenty of fear that the large blue-chip multinationals are going to have a hard time with the dollar’s high valuation.”  


Outflows from S&P 500 ETF

S&P 500 ETF Trust, the SPDR, is the largest ETF that tracks the U.S. benchmark index. This quarter, the trust has seen the most significant outflows compared to all other equity ETFs as investors withdraw 28.3 billion.

Investors are increasingly attracted to more promising returns elsewhere. For example, this quarter alone, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF and the WisdomTree Europe Hedged Equity Fund have attracted $9.4 billion, the largest amount among all equity funds.


Market impact

In the options market, it is clear that investors are becoming less and less interested in U.S. equities.

On the SPDR S&P 500 ETF Trust, bearish contracts are already 9.25 points more than bullish contracts. The difference, which continues to expand as demand for stock market hedges grows, touched the 9.42 mark on February 9, the widest gap in a year.


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