Just when we thought the conflict between Russia and Ukraine was beginning to deescalate, President Joe Biden warned on Thursday that the possibility of a Russian invasion was “very high.”
Moscow continues to deny any aggressive action, but still demands assurances that NATO will withdraw from Eastern Europe and that Ukraine will never join the military alliance. Ukraine reiterated that it would not give in to these demands.
The geopolitical landscape continues to fuel the risk aversion sentiment gripping the market. On Thursday, broad-based U.S. equity indices traded lower: Nasdaq (-2.88%), S&P 500 (-2.12%) and Dow Jones (-1.78%). The VIX jumped 15.73% and the 10-year Treasury yield fell below 2.0% (-3.66%).
Stock markets aren’t the only asset class to suffer, and with high inflation and strong consumer spending, the Federal Reserve is expected to raise interest rates multiple times this year.
One of the most direct impacts of possible future rate hikes is felt in the housing market. According to the Mortgage Bankers Association (MBA), the average 30-year fixed rate conforming mortgage rate rose to 4.05% – marking the first time it has exceeded 4.0% since October 2019.
Goldman Sachs and Bank of America have now scheduled seven interest rate hikes this year, so there’s a good chance mortgage rates will continue to rise. Mortgage applications for new homes fell 5.4% weekly and refinance applications fell to the lowest level since the second quarter of 2019.
In the current macro environment, which Lipper classifications made the largest inflows and outflows last week?
The top five entries in the Lipper classifications for the week ended Feb. 16, 2022 were Lending Equity Funds (+$1.8 billion), S&P 500 Index Funds (+$1.3 billion), Mutual Funds science and technology (+$1.2 billion), equity income funds (+$1.1 billion) and Multi-Cap Core Funds (+$1.1 billion).
While loan participation funds, equity income funds and multi-cap core funds saw persistent inflows to start the year, Lipper S&P 500 index funds and Lipper Science & Technology funds were more volatile. The graph below shows the net flows for the five Lipper classifications over the past four weeks.
On the other hand, the top five outflows from the Lipper classifications for the week ended Feb. 16 were global large-cap funds (-$3.9 billion), high-yield funds (-$3.5 billion dollars), large cap growth funds (-$2.0 billion). ), BBB-rated corporate debt funds (-$1.7 billion) and short US Treasury funds (-$1.7 billion).
High-yield funds and BBB-rated corporate debt funds suffered back-to-back large weekly outflows, continuing their trend from last year.
As another casualty of a rising rate environment, your regular fixed income security becomes less attractive as rates rise and higher yields are found elsewhere. The graph below shows these five Lipper classification net flows over the past three years along with their preliminary year-to-date totals.
The final element to highlight is the shift from large cap growth issues to a more multi-cap and value approach. Lipper large-cap growth funds have seen $16.5 billion out of the gate so far this year after posting three consecutive years of annual outflows. The beneficiaries so far are the Lipper Multi-Cap Core Funds (+$12.6 billion) and the Lipper Large-Cap Value Funds (+$5.2 billion).
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.