The flow story is getting mighty interesting from several facets, and these are my observations on what is going on:
Starting with Informa’s EPFR, below is a chart that appeared in the Financial Times in an article titled “Aging population bolsters flight from U.S. stocks to bonds.” This article hits two nerves with me. First, it portrays an interesting sense of sentiment as manifested in mutual funds and ETF flows tracked by EPFR. Specifically, in this postelection and Fed-tightening realm, investors still favor, highly, bonds over stocks. Next week I might break the bond flows down a bit more into the style of fixed income, but for now suffice it to say the preference is clear. This is I think a vote on broad economic confidence, inflation and risk tolerance. Call that economic sentiment.
The notion that the aging population is geared toward adding to bonds is hardly surprising, and it touches that second nerve. They need to preserve capital, not risk it, and such investing behavior is well documented in surveys and anecdotal evidence. The thing is that with low rates likely to be here for a very long while—a decade is my call—people need to save that much more to generate income, which means spending less on consumption.
David Ader is chief macro strategist for Informa Financial Intelligence.