Record Influx Amidst Economic Volatility
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Attempting to recover from the setbacks faced in April, investors steered a monumental $87 billion into U.S. ETFs in May, as per data from Morningstar released on Thursday. The surge in investments coincided with a notable shift in how market participants are interpreting economic data.
The three largest ETFs in the market—SPY, VOO, and IVV—saw a combined inflow of $22.8 billion in May. This influx occurred alongside soaring major stock averages such as the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average, which all touched record highs. While ETFs are projected to hit a $775 billion mark by the end of 2024, this forecast falls slightly short of the record set in 2021 but surpasses the figures from the past two years, indicated Morningstar.
Interpreting Market Reactions
Morningstar emphasized the “solid” 1.7% return of the Vanguard Total Bond Market ETF (BND) in May. Bond markets appeared to consider the economic data along with the Federal Reserve’s commentary as indications of a more stable inflation environment, stated Ryan Jackson, a manager research analyst at Morningstar. Towards the end of May, bonds rallied after markets interpreted slower-than-expected economic growth data as a potential signal for future rate cuts.
While U.S. stocks also experienced positive growth during May, the reasons behind their surge varied, explained Jackson. Pointing to the 4.8% return of the Vanguard Total Stock Market ETF (VTI), he highlighted that most of the gains were made in early May. However, stocks retreated in response to the same economic data that propelled bonds higher, indicating a clear change in sentiment among investors.
Shifting Investor Sentiment
Since the surge in inflation during late 2021, investors have begun to view disappointing economic data as positive news for stocks, anticipating potential declines in interest rates. However, this economic slowdown has been perceived not as a favorable tailwind for stocks but as a challenge due to potential weak consumption trends, reflected Jackson.
Interestingly, stocks and bonds have exhibited significantly higher correlation levels over the past three years compared to historical averages. Jackson cautioned that the divergence between stocks and bonds following economic news must be monitored closely to gauge future market trends.
May’s Top Flow Categories
The chart below illustrates Morningstar’s analysis of the categories which saw the largest inflows in May.
