April saw the fourth straight month of gains for global stocks. The longest winning streak since January 2018 pushed 72% of global equities to trade above their 200-day moving average—a reversal from how the year began, when only 23% of stocks were trading above their 200-day average. This is combined with the fact that the S&P 500 Index and the NASDAQ Composite Index are again trading above all-time highs. What once appeared to be the “endgame” for the longest-running bull market in history has now been replaced with a rally in which everything is moving higher and it seems “everyone is getting a trophy.”

But will the global equity markets’ 16% gain through April translate into the currently calculated annualized 56% full-year 2019 return? Three factors to watch:

1) Participation: It’s been a low-participation rally, with trading across all US exchanges down 12% from last year. This signifies a lack of broad-based conviction. If volumes tick higher, that may confirm that further gains have room to run as more investors come to the table.

2) Margins: The blended net profit margin for S&P 500 firms is set to post the largest year-over-year decline since Q4 2016, with 10 of 11 sectors posting declines. The declines are not solely US-centric either. Net profit margins for non-US stocks have now declined year-over-year for five consecutive months. Earnings growth as a rally catalyst is likely to face challenges if this continues.

3) Valuations: In the US, valuations are no longer attractive, trading in the 84th percentile over the past 15 years. Outside the US, valuations are more appealing. However, they’re not what they were at the start of the year. In all major regions, multiple expansions account for over 100% of this year’s return. Growth will need to follow for investors to keep paying.

Asset class ETF flows: Equities hit it out of the park

Grip and rip was the mantra in April, as investors sought to capture further upside in equities. With global equities continuing to rally, investors poured $25 billion into the segment in April. This is the highest monthly flow total for equities in 2019, helping to push the category above fixed income for the first time this year.

Fixed income ETF flows slowed as a result of the exuberance expressed by investors with a lesser desire to ballast portfolios from volatility. After posting above-average flows for the past four months, the momentum slowed, with fixed income flows coming in 22% below the 3-year average, as shown in the chart below.

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Source: Bloomberg Finance L.P., State Street Global Advisors, as of 04/30/2019.

Equity ETF geographical flows: International prospects

US-focused equity ETFs are the largest market based on assets under management, making absolute flow comparisons difficult, as there are likely to be leaders and laggards for any given month based only on their sheer size. Therefore, we find it constructive to examine flows based on the percent of start-of-period assets, as it can foretell the magnitude of shifts on a relative basis across different market segments.

Taking this approach, we find that while the US grabbed the headlines, international, regional and single-country funds witnessed the highest flows as a percent of their asset base in April. The $1.4 billion into regional funds and the $2 billion into single-country funds represent a 2.8% and 2.2% increase, respectively. Chinese equity-focused ETFs took in $400 million, extending their year-to-date lead in the category to over $2 billion, as investors continued positioning for renewed hopes of a US-China trade deal and the stabilization of downbeat economic data.

At the regional level, the return of European-focused strategies snapped a 13-month losing streak of outflows. Valuations continue to remain attractive, and there has been a slight improvement with economic data, with the recent gross domestic product (GDP) report for the region coming in better than expected. With tense European elections this May, these positive flow trends bear watching. The chart below signifies how negative the positioning has been toward the European region since 2016 and the start of Brexit.

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Source: Bloomberg Finance L.P., State Street Global Advisors, as of 04/30/2019.

Sector ETF equity flows: Health Care sent to the bench, Financials called up

Health Care funds went on a policy-induced slump in the month of April, and investors put them on the bench. Health Care stocks fell 2.7% on the month and were the worst-performing sector in the S&P 500. The selloff, in what was one of the best-performing sectors over the past six months, was a byproduct of the recent announcement from Health and Human Services Secretary Alex Azar calling for large employers to ensure that their workers get prescription drug rebates at the pharmacy counter. As shown below, the rotation out of Health Care and into Financials pushed cyclicals ahead of defensives on a rolling 3-month basis.

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Source: Bloomberg Finance L.P., State Street Global Advisors, as of 04/30/2019. Cyclicals and Defensive classifications based on MSCI classification schemes. Cyclicals are Communications Services, Consumer Discretionary, Real Estate, Financials, Industrials, Materials and Technology. Defensives are Consumer Staples, Energy, Health Care and Utilities.

Year-to-date double-digit gains aside, everyone won’t get a trophy. That only happens in T-Ball, and this isn’t T-Ball. This is the big leagues, where macro data can ride in on the hands of hitters jamming any power stroke, and earnings misses can buckle a batter’s knees. For the next few at-bats of this late cycle game that keeps getting extended, consider the following three ideas:

1) Growth: Stay invested with equities but target inexpensive firms with sustainable cash flows and quality balance sheets to mitigate slowing margins.

2) Bonds: Make sure bonds acts like bonds, providing diversification, stability and income to temper equity risk in the portfolio.

3) Diversify: Non-US stocks have lagged over the past few years, but shifts are cyclical and targeting foreign fiscal policy beneficiaries may enhance and diversify returns.

Stay current on what State Street Global Advisors is seeing in ETF flows: Follow SPDR® Blog and check back monthly for my ETF Flows post. You can also access the full April ETF Flows report here.

Definitions

200-day Moving Average
The 200-day moving average is a popular technical indicator that investors use to analyze price trends. It is simply a security's or index’s average closing price over the past 200 days.

Annualized Total Return
An annualized total return is the geometric average amount of money earned by an investment each year over a given time period. Annualized total return provides only a snapshot of an investment's performance and does not give investors any indication of its volatility.

Brexit
Brexit is the withdrawal of the United Kingdom (UK) from the European Union (EU).

Gross Domestic Product
Gross Domestic Product (GDP) is a broad measurement of a nation’s overall economic activity. GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

MSCI
MSCI is a global provider of equity, fixed income, hedge fund stock market indexes, and multi-asset portfolio analysis tools.

Nasdaq Composite Index
The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. 

Net Profit Margin
The net profit margin is equal to how much net income or profit is generated as a percentage of revenue.

S&P 500 Index 
Standard and Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S. equities.

Trailing three-month average
The average over the prior three months.