According to data from LSEG Lipper, a small group of technology stocks is propelling the stock market to new heights. However, investors have been steadily withdrawing from equity funds in the first five months of 2023, opting for fixed-income alternatives instead.
Through the end of May, an estimated $114.3 billion has been pulled out of conventional equity funds as investors prepare for the anticipated impact of higher rates set by the Federal Reserve on the U.S. economy.
Conversely, equity exchange-traded funds (ETFs) have seen an inflow of $36.8 billion during the same period, somewhat offsetting the total outflows from equity funds, as reported by LSEG Lipper data.
Digging deeper into the data, Tom Roseen, head of research services at LSEG Lipper, highlights that investors have shown reluctance towards large-cap funds, which experienced outflows of $39.4 billion through the end of May.
Investors have instead been flocking towards taxable fixed-income funds, which have accumulated $63 billion so far this year. This shift is driven by the appeal of some of the highest bond yields witnessed in approximately two decades.
Recently, the yields on certain short-term Treasury bills surged above 7% amidst the debt-limit battle. However, the 1-month T-bill rate has since decreased from its recent peak of approximately 5.7% to around 5.2% as of Monday. The risk of a first-ever U.S. default was recently averted through the suspension of the debt limit until 2025, thanks to a bill signed into law by President Joe Biden.
Despite the outflows from stocks, the Nasdaq Composite Index has still managed to advance by 26.4% year-to-date through Monday. Similarly, the S&P 500 index briefly surpassed 4,299.28 on Monday but failed to close above the 4,292.44 level required to officially exit bear-market territory. To qualify, the large-cap benchmark would need to record a closing level that is 20% or more higher than its October low.
Critics of the rally point out that the gains in stocks this year have primarily been driven by the performance of seven dominant tech companies. Although shares of Apple Inc. experienced a slight 0.8% decline on Monday, they had previously approached a record high.
Detractors highlight a potential vulnerability in the rally, given that the combined market capitalization of Apple, Microsoft Corp., Google parent Alphabet Inc., Amazon.com Inc., Nvidia Corp, Facebook and Instagram parent Meta Platforms Inc., and Tesla Inc., has been responsible for driving the S&P 500's 11.3% gain this year.
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