Amid all the bearish sentiment from big investors like Janus' Bill Gross that the markets are treading on "thin ice," it was still risk-on in August for many investors.
The latest exchange-traded funds monthly flows data shows August was a continuation of the July risk-on positioning of investors, and specifically, emerging markets equity ETFs took in near-$5 billion in August. That put emerging markets equity ETFs ahead of U.S. large-cap for new investing dollars, according to ETF flows data from FactSet Research Systems.
The top ETF in August net flows was the iShares MSCI Emerging Markets ETF (EEM), with near-$2.2 billion net flows, and three of the top 10 ETFs in August were emerging markets equity funds.
The popularity of emerging markets speaks to the persistence of low interest rates and market expectations — at least until late in August and Janet Yellen's Jackson Hole speech — that the Fed would remain in its patient pose. The weak jobs number reported on Friday morning may mean that investors continue to bet that a patient Fed keeps the stock market moving up.
"Investors were more comfortable taking on risk in August," said Todd Rosenbluth, director of mutual fund and ETF research at S&P Global Market Intelligence.
Another sign of the risk appetite among investors: Investors rotated into the PowerShares QQQ (QQQ), tracking the Nasdaq 100 in August, with almost $1 billion going into that ETF, even though it's seen outflows of more than $4 billion this year. Technology saw its first positive month since April.
The single biggest move in August — as a percentage of ETF assets — was the Industrial Select Sector SPDR (XLI), which was No. 10 in net flows in August, with $859 million, a haul that represented 11 percent of the ETF's total assets.
Risk-off indicators, such as SPDR Gold Trust (GLD) and iShares Edge MSCI Minimum Volatility USA (USMV), are among the top 10 ETFs in flows year-to-date, but both experienced outflows in August — $612 million for GLD and $425 million for USMV. They were the only two of this year's top 10 ETFs to experience outflows in August.
Led by GLD outflows, the gold sector saw its first negative flows since April.
(Source: FactSet Research Systems)
While emerging markets had a big month, it wasn't a sudden move up — iShares two broad emerging markets ETFs are among the top 10 ETFs for flows in 2016.
And August was only the third best month of the year for emerging markets equity flows, behind July ($6.3 billion) and March ($5.6 billion), according to FactSet data.
Neena Mishra, director of ETF research at Zacks Investment Research, said several factors have contributed to the EM rally: the quest for yield in the current ultra-low interest-rate environment in the developed world; the easing of dollar headwinds; the search for higher returns (with higher risks); and better value in EM stocks, which are much cheaper compared to U.S. stocks, which have been rallying for the past seven years.
In addition, the recent commodity stabilization and an improving economic outlook for EMs — China stabilizing, India growing at a fast pace and the worst over in Brazil and Russia, have all contributed to more appetite for emerging markets.
(Source: FactSet Research Systems)
Another big shift in August among investors was sector rotation. Financials and energy rebounded from a dismal July to top August's sector inflows at $1.4 billion and $1.1 billion. Meanwhile, telecommunications shifted into the red for the first time this year. The $312 million loss was the sector's first negative outflow since September 2015.
"August continued last month's classic risk-on trend, with strong flows throughout equities and fixed income, domestic and international," said FactSet ETF analysts in a release.
The risk-on situation remains tenuous, though. "Investors could rotate back into risk-off securities if there's concerns about the likelihood of the Fed's next move occurring earlier," Rosenbluth said.
A whipsaw in emerging markets equity, specifically, wouldn't be without precedent.
"Prior to the Jackson Hole symposium, the market was pricing in a low probability of a Fed rate hike this year. As a result, the dollar's rally had petered out and oil/other commodities had rebounded," Mishra said. "But things have changed slightly after that meeting. If the Fed raises rates, EM inflows will likely slow down. EMs were hard-hit during taper tantrum in 2013," she added.
The market expectation for Friday's nonfarm payroll was 180,000 jobs added in August but the report showed weaker than expected job growth of 151,000 which isn't the trigger the market was looking for in terms of the Fed raising rates as soon as this month.
On Thursday, when a key read on manufacturing growth came in at a surprisingly low level, indicating contraction, the market bet on a Fed raise in September went down from 40 percent to 34 percent. Economists had said that any jobs number 200,000 or more would have led to a September rate hike. After the August jobs disappointment on Friday morning the market prediction for a September rate hike dropped to 25 percent.
Notable bears such as Bill Gross of Janus aren't changing their tune. In his September investor letter released earlier this week, Gross said, "The problem with Cassandras, such as Gross and Jim Grant and Stanley Druckenmiller, among a host of others, is that we/they can be compared to a broken watch that is right twice a day but wrong for the other 1,438 minutes. But believe me: This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies. Sooner rather than later, Yellen's smooth shot from the fairway will find the deep rough."