Sentiment Surprises to the Upside


Head of SPDR Americas Research

Risk assets rallied in October after months of negative returns. Stocks posted their best October return since 2015 and high yield bonds rallied 3% as spreads tightened. Buoyed by $60 billion of inflows into equity ETFs, total flows surpassed $90 billion in October. Meanwhile, bond flows were their fifth-most ever (+$27 billion), fueled by a resurgence in high yield flows (+$7 billion, second-most ever).

October is full of surprises. A World Series pretender turns into a contender. Kids try their best Michael Myers impressions on unsuspecting adults. And of course, Instagram like-inducing posts of fall foliage mean hours of blister-producing raking that your instafriends never see.

This October doled out a fresh surprise to investors. Risk assets rallied after months of Federal Reserve rate hike fueled negativity. Global equities posted their best October return since 2015 and their best overall monthly return since this past July.1

This rally was a welcome sight. Yet, is this rally more like the sixth grader dressed in the Guy Fawkes costume ready to egg your house the minute you shut off the front light at 8 PM (i.e., the tricker) or the sweet second grader living her best Elsa life asking for just one more Kit-Kat (i.e., the treater)?

Signs point to this rally being slightly more durable than the one in July, as heavily shorted stocks (i.e., a short cover rally) didn’t bounce higher in October. Another indicator is the buying behavior this time around.

Back in July, ETFs had only $35 billion of inflows. In October, however, sentiment surprised to the upside with ETFs taking in $90 billion. Yet, not all areas thrived.

Big Flows, But Still Sub-par Depth

Following months of below-average flows, ETFs surprised to the upside in October with $90 billion of inflows. Equity flows drove the topline figures, taking in $64 billion in October. Funds focused on the US were the primary allocation, taking in $55 billion.

For all ETFs, this is the sixth-most flows ever for ETFs and pushed total flows to over $500 billion for the year. In fact, as shown below, the flows in 2022 are now the second-most ever — surpassing the prior second place record of $503 billion in 2020. This is also now the third consecutive year with flows over $500 billion.

So far in 2022, even with the significant volatility, flows averaged $48 billion a month. Historically, November and December have averaged a combined $120 billion of inflows. Apply these two averages into an ensemble forecast, and ETFs could conceivably witness inflows of $110 billion over the next two months. This would put forecasted full-year flows at $620 billion.

Flows go over $500 billion for the year

Flows go over $500 billion for the year

While the notional total flow figures for October were impressive, the beneath-the-surface trends were not overly robust. Similar to prior months of below median participation, only 54% of funds had inflows (versus a historical 63% rate).

The lack of depth extended across all major categories, as not one segment was above its historical median. And in the prior five instances when flows were over $90 billion in a single month, the participation rate averaged 67%. Overall, the below median participation rate supports the trepidation toward the vibrancy of the headline buying behavior.

Sectors Strike Back with Inflows While Dividends Remain in Style

Following their worst month of outflows ever in September (-$9.9 billion), sector funds rebounded in October with their ninth-best month ever – taking in $7.6 billion. This pushed full-year sector flows positive once again. Nine out of the 11 sectors had inflows in October, a reversal of the year-long trend as only five sectors have net inflows year-to-date. The flows and depth are a good sign of risk-taking.

Technology led all sectors in October with $3 billion of inflows while cyclicals (+$3.3 billion) outpaced defensives (+$600 million). Yet, the latter, led by $1.4 billion into Health Care, posted a record 12th consecutive month of inflows — underscoring the preference for defense in 2022.

Sector Flows

Sector Flows

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1 Bloomberg Finance L.P. as of October 31, 2022 based on the return of the MSCI ACWI Index.
2 Bloomberg Finance L.P. as of October 31, 2022 based on the return of the S&P 500 Pure Growth and Pure Value Indexes.
3 Bloomberg Finance L.P. as of October 31, 2022 based on the Bloomberg US Corporate High Yield Index.
4 Bloomberg Finance L.P. as of October 31, 2022 based on the Bloomberg US Corporate High Yield Index.
5 FactSet as of October 31, 2022 based on the S&P 500 Index.
6 Bloomberg Finance L.P. as of October 31, 2022 based on Fed Funds futures pricing.


S&P 500® Index
A market-capitalization-weighted stock market index that measures the stock performance of the 500 largest publicly traded companies in the United States.

S&P 500® Pure Value Index
A style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme.

S&P 500® Pure Growth Index
A style-concentrated index designed to track the performance of stocks that exhibit the strongest growth characteristics by using a style-attractiveness-weighting scheme.

Bloomberg US Corporate High Yied Index
Tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.

Smart Beta
A term for rules-based investment strategies that don’t use conventional market-cap weightings.

Originally Posted November 3, 2022 – Sentiment Surprises to the Upside


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