Mutual fund money flows are generally watched as indicator of the health of the capital markets – but there is a strong argument that they are also a predictive economic indicator in their own right, says Nicholas Colas, chief market strategist at ConvergEx Group.
He acknowledges that retail investors have a bad reputation for selling the market at the bottom and buying at the top.
But after overlaying a chart of equity fund flows with a variety of widely-watched economic indicators – such as non-farm payrolls, retail sales, personal income/expendi- tures and tax receipts – Mr Colas found they clearly led the data by anywhere from six to 12 months.
“Fund flows may be predictive for no other reason than that they are the ‘canary in the coal mine’ of affluent consumer sentiment and buying intentions,” he says.
So what are they indicating right now?
“The short answer is that, at the margin, things are not pointing in the right direction,” Mr Colas says. “Equity mutual funds saw outflows in May and early June – and pretty sizeable ones at that.
“In the past five weeks, equity fund investors have pulled out $30bn of capital from domestic and foreign investments. We have not seen that magnitude of redemptions since the early 2008 market lows.
“Given this indicator’s excellent near-term track record, we think it bears watching at the very least.”