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Investors were net sellers of fund assets (including those of conventional funds and ETFs) for the first week in six, redeeming a net $2.1 billion for the LSEG Lipper fund-flows week ended Wednesday, May 31. Fund investors were net purchasers of money market funds (+$3.8 billion) and equity funds (+$2.2 billion) while being net redeemers of taxable bond funds (-$6.7 billion) and tax-exempt fixed income funds (-$1.3 billion) for the week.

Market Wrap-Up

A strong surge in mega-cap technology stocks helped the Nasdaq composite post its strongest fund-flows week return since the week ended February 1. However, a continuation of the debt ceiling standoff, stubborn inflation, and rising interest rates continued to weigh on market participants.

On the domestic equity side of the equation, the excitement around artificial intelligence technology and a strong Q1 earnings report from Nvidia (NVDA) helped offset ongoing concerns about the looming U.S. debt ceiling deadline, with tech-oriented stocks leading the way for the flows week. The Nasdaq Composite (+3.61%, its best performance in 17 weeks) posted the strongest return of the broad-based U.S. indices, followed by the S&P 500 (+1.57%) and the Dow Jones Industrial Average (+0.33%). The Russell 2000 (-0.98%) was the laggard of the group. Overseas, the Nikkei 225 (+0.15%) posted the only plus-side returns of the often-followed broad-based international indices. Meanwhile, the Shanghai Composite (-0.90%), the Xetra DAX Total Return Index (-2.06%), and the FTSE 100 (-2.15%) posted losses for the flows week.

For the fund-flows week, the Bloomberg U.S. Aggregate Bond Index (+0.78%) outpaced the Bloomberg Municipal Bond Index (+0.46%) and the Morningstar LSTA U.S. Leveraged Loan Index (+0.02%). The 10-year Treasury yield declined nine basis points (bps) for the week, settling at 3.64%, while the two-year Treasury yield rose nine bps to close out the flows week at 4.40%. The U.S. Treasury yield curve remained inverted, with the two- and 10-year Treasury yield spread (-76 bps) widening 18 bps for the week.

On Thursday, May 25, the Nasdaq posted its strongest daily gain in three weeks after Nvidia beat its Q1 earnings expectations, with the news lifting semiconductor issues and other technology-related companies on the day. That said, the Dow suffered its fifth consecutive session loss as investors continued their handwringing over the debt ceiling discussions. In other news, declining crude oil prices weighed on energy firms, as front-month crude oil futures fell 2.9%, settling at $72.20/barrel. Investors were also keeping a keen eye on new first-time jobless claims, which showed U.S. unemployment benefits rose by 4,000 for the prior week to a seasonally adjusted 229,000.

The Nasdaq and S&P 500 finished at their highest levels since August 2022 on Friday, May 26, as investors embraced reports that suggested Congress was close to a deal to raise the U.S. debt ceiling ahead of the Memorial Day three-day weekend. Investors appeared to largely ignore news from the Bureau of Economic Analysis that showed the core personal consumption expenditures (PCE) price index for April rose 0.4%. On a year-over-year basis, core inflation rose 4.7%, up from the 4.6% rate in March. The PCE data also showed consumer spending rose 0.8% in April, its largest rise in three months.

Markets were closed on Monday, May 29, in observance of the Memorial Day holiday.

U.S. stocks ended mixed on Tuesday, May 30, as investors weighed news of a debt ceiling deal and continued to focus on whether the Federal Reserve Board might skip a rate hike or not at its next policy-setting meeting in June. Over the Memorial Day weekend, President Joe Biden and House Speaker Kevin McCarthy reached a deal to lift the U.S. debt ceiling. But investors are now wondering if they can sell the agreement to their parties, with just a few days left until the federal government might be unable to pay all of its bills. In other news, the Conference Board said consumer confidence fell to a six-month low in May. The index fell to 102.3 but beat analysts’ expectations of 99.

On Wednesday, May 31, U.S. stocks ended lower ahead of a debt ceiling vote in the House of Representatives. However, comments by Federal Reserve officials that the central bank might skip an interest rate hike at their June meeting helped keep the carnage in check. Philadelphia Fed President Patrick Harker said, “I am in the camp increasingly coming into this meeting thinking that we really should skip, not pause, but skip an increase.” As a result, fed-fund futures traders pushed the probability of a 25 bp hike in June to 33.2% from 70% earlier in the morning, according to the CME FedWatch tool.

Exchange-Traded Equity Funds

Equity ETFs witnessed net inflows for the second week in a row, attracting a little less than $7.2 billion for the most recent fund-flows week. Authorized participants (APs) were net buyers of domestic equity ETFs (+$6.6 billion), injecting money also for the second week in a row, while nondomestic equity ETFs witnessed their fourth consecutive week of net inflows, taking in $631 million this past week. Large-cap ETFs (+$7.4 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by sector-technology ETFs (+$1.3 billion) and equity income ETFs (+$790 million). Meanwhile, small-cap ETFs (-$766 million) suffered the largest net outflows, bettered by the commodities heavy sector-other ETFs (-$675 billion) and sector-energy ETFs (-$646 million).

SPDR S&P 500 (SPY, +$5.3 billion) and Invesco QQQ Trust 1 (QQQ, +$3.3 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, iShares Core S&P 500 ETF (IVV, -$776 million) experienced the largest individual net redemptions and iShares Russell 2000 ETF (IWM, -$747 million) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the first week in four, taxable fixed income ETFs experienced net outflows, handing back $957 million this week. APs were net purchasers of corporate investment-grade debt ETFs (+$600 million), international & global debt ETFs (+$134 million), and flexible ETFs (+$92 million) while being net redeemers of corporate high-yield ETFs (-$1.2 billion) and government-Treasury ETFs (-$678 million).

iShares Core US Aggregate Bond ETF (AGG, +$552 million), iShares 7-10 Year Treasury Bond ETF (IEF, +$235 million), and iShares US Treasury Bond ETF (GOVT, +$233 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares Short Treasury Bond ETF (SHV, -$380 million) and SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, -$367 million) handed back the largest individual net redemptions for the week.

For the first week in three, municipal bond ETFs witnessed net inflows, taking in $45 million this week. iShares National Muni Bond ETF (MUB, +$233 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares Short-Term National Muni Bond ETF (SUB, -$253 million) experienced the largest net redemptions in the subgroup.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net sellers of equity funds for the sixty-ninth week in a row—redeeming $5.0 billion—with the macro-group posting a 0.32% market gain for the fund-flows week. Domestic equity funds—suffering net redemptions of slightly less than $4.7 billion—witnessed their twenty-second consecutive week of net outflows while posting a 0.66% market advance on average for the fund-flows week. Nondomestic equity funds—posting a 0.45% weekly market loss on average—observed their fifteenth week of net outflows in a row, handing back slightly less than $345 million this week.

On the domestic equity side, fund investors were net redeemers of large-cap funds (-$2.5 billion) and equity income funds (-$647 million). Investors on the nondomestic equity side were net redeemers of international equity funds (-$189 million) and global equity funds (-$156 million) for the week.

Conventional Fixed Income Funds

For the fifteenth week in a row, taxable bond funds (ex-ETFs) witnessed net outflows—handing back $5.8 billion this past week—while posting a 0.45% market gain on average for the fund-flows week. The government-Treasury funds macro-group attracted the only draw of net money for the week, taking in $235 million. Corporate investment-grade debt funds (-$3.3 billion) suffered the largest net redemptions, bettered by flexible funds (-$1.1 billion) and corporate high-yield funds (-$986 million).

The municipal bond funds group posted a 0.76% market rise on average during the fund-flows week (their first weekly market gain in three) and witnessed net outflows for the fifteenth straight week, handing back $1.4 billion this week. High Yield Municipal Debt Funds (-$493 million) suffered the largest net outflows of the macro-group, bettered by Intermediate Municipal Debt Funds (-$237 million) and Short Municipal Debt Funds (-$163 million). None of the classifications in the macro-group witnessed net inflows.

Money Market Funds

Given the continued uncertainty surrounding the U.S. debt ceiling, many investors remained on the sidelines, padding the coffers of money market funds (+$3.8 billion) for the sixth consecutive week. Institutional Money Market Funds (+$28.5 billion) took in the largest draw of net new money for the week, followed by U.S. Government Money Market Funds (+$2.4 billion), while Institutional U.S. Treasury Money Market Funds (-$24.5 billion) suffered the largest net redemption.

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