On the surface, the stock market is strong, and investors are happy. The U.S. market hit an all-time high in August. But there is trouble brewing in the market, and it is getting ready to boil over, according to some of the big U.S. banks. Over the last ten weeks, U.S. stocks had outflows of more than $30 billion. That is the longest streak of outflows since 2004, according to Bank of America Merrill Lynch. Investors are betting Japanese and European stocks will produce the kind of returns they want right now. Japanese and European stocks are enjoying the $36 billion in inflows they received over the last 10 weeks. And if Hurricane Harvey does the kind of damage the weather people think it will, insurance stocks and utilities will take a beating this week.
This mass exodus from U.S. stocks is not happening in just one sector of the economy. Technology stocks saw $600 million in outflows last week, and $35 million left the financial sector for the second straight week. Consumer stocks had outflows of $1.5 billion, and that is the third largest outflow ever. The defense utility sector was the only sector to see slight inflows last week.
Federal Reserve Chairman Janet Yellen didn’t mince words about the looming financial crisis in a Jackson Hole Wyoming on Friday. Yellen thinks investors should not take risks in the financial market right now. Yellen is avoiding questions about monetary policy, and some economists believe she is avoiding the issue because there are signs that the global economy is going to slow down, and the U.S. economy is going to do the same thing. The health of the U.S. economy is not as great as the Trump administration says it is. Treasury bonds had inflows of more than $900 billion over the last ten weeks, and that is a sign that investors are nervous about the economy. Risky high-yield debt saw $2.2 billion leave in outflows in eight of the last ten weeks.
Even though there are signs that the U.S. and global economies are in trouble, some economists think the outflows will not produce a major market downturn. But if 2007/2008 financial debacle is a measuring stick, and if banks like Citigroup and Bank of America are telling people there is a downturn coming, investors must protect their assets any way they can. It seems the big money hedge funds are doing that now, and small investors should do the same thing.