As stocks and bonds gyrate in well-defined ranges, the exchange traded-fund industry is sending a clear message: traders are tired.
US ETFs traded $2.1 trillion worth of shares in April, the lowest monthly total since August 2020 and roughly half of March’s trading, Bloomberg Intelligence data show. The drop-off coincides with the Treasury market’s quietest month in two years, while the S&P 500 remained locked in a range.
The standstill follows a dramatic start to 2023 that saw at least three US banks fail amid the Federal Reserve’s ultra-aggressive campaign to quell still-sticky inflation. That uproar gave way to an impasse in April, with softening economic data and worries of a credit crunch colliding with better-than-feared corporate earnings. That’s put weary traders largely on the sidelines, according to Wells Fargo Investment Institute’s Sameer Samana, or crowding into lofty-yielding money market funds.
“Some combination of high levels of exhaustion and indifference on the part of investors are the exact sentiment you expect to see from investors during a bear market,” said Samana, the firm’s senior global market strategist. “They make you feel like you’re taking all of the risk, with none of the return.”
The S&P 500 drifted 1.5% higher in April, within its tightest range since November 2019, according to data compiled by Bloomberg. While credit crunch concerns have given bears plenty of fodder, a solid start to the first-quarter reporting season — which painted a picture of a still-solid US consumer and resilient megacap tech companies — has quieted some of the loudest worst-case scenario calls.
Meanwhile, a persistent grind lower in the Cboe Volatility Index added to that sense of indifferent. The gauge, known as the VIX, slipped for six straight weeks to end April below 16, the first time since November 2021, after spiking above 30 in March following the sudden collapse of Silicon Valley Bank.
The bond market wasn’t much livelier. Yields on 10-year Treasuries fell less than five basis points in April, the smallest monthly move since May 2021. That’s a sea-change from when 10-year yields whipsawed by more than 30 basis points in each of the first three months of the year as investors weighed the risk of stubborn price pressures against fears that lending standards would tighten and dry up access to credit.
“It’s very difficult to break out of the range,” Alexandra Wilson-Elizondo, co-head of portfolio management for multi-asset solutions at Goldman Sachs Asset Management, said on Bloomberg Television’s Real Yield. “If you do get to a point where you get a breakout in yields, we think there’ll be a bid to markets because people are really interested in adding that traditional ballast back into portfolios.
The first trading day of May showed few signs of reinvigoration. The S&P 500 was little changed at the open, despite the early Monday bombshell that JPMorgan Chase & Co. agreed to acquire failed First Republic Bank in a government-led deal, marking an end to the second-biggest bank failure in US history.
Added together, the battling cross-currents of the future of Fed policy, questions about further shoes to drop in the banking system and slowing economic growth have created a stalemate of sorts.
“People are bearish on the economy and stocks for something in the future but that future isn’t arriving fast enough for the market to move. So it’s a stalemate,” said Brent Donnelly, president of Spectra Markets. “No incentive to deploy new cash, but no ammo to put on new shorts.”
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