The volatility of the March-April period led many analysts and pundits to believe that the American equity market was setting up for the traditional “sell in May and go away” phenomenon. During this period, the technology and small cap sectors were most visibly impacted by this volatility, as the NASDAQ Composite index fell by 8%, and the small cap Russell 200 index fell by over 9%. This seemed to portend the start of a proper equity market correction.
As technology and small-cap stocks were falling in value, capital was flowing into bond funds and bond exchange traded funds (ETFs). There appeared to be a Great Rotation in the works (out of equities and into bonds). According to Lipper Inc and research firm ETFGI, investors made net deposits of $22 billion in ETF bond funds year-to-date, representing more than 5% of total bond ETF assets. Strong demand for bonds made them scarce and investors, ever searching for higher yields, increased their appetite for lower-quality government and corporate (so-called “high-yield”) bonds. Over the past 12 months, the SPDR Barclays Short-term High Yield Bond ETF has received $2.7 billion in net inflows or 64% of its total assets.
At the same time, the anticipated correction in U.S. equity markets appears to be over, as the NASDAQ Composite and Russell 2000 indices are at or near their early-March highs. The heightened volatility in these benchmark indices did not spill over to the broader S&P 500 index, which is making new historic highs. We expect that the near future will show whether the investment flows have reverted back to equities and the “Great Rotation” has been halted.
By: Ukrainian Credit Union Limited
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