US equity funds see sharp outflows on tariff caution, economic concerns

U.S. investors exhibited a significant risk-off sentiment in the week through August 6, pulling a net $13.7 billion from equity funds—their largest weekly sales since June 25—and channeling a net $78.85 billion into money market funds, the largest amount since December 4, alongside an 11-week high of $7.39 billion into bond funds. This shift was primarily driven by concerns over new trade tariffs and discouraging economic readings, with small-cap equity funds suffering the most, although sectoral funds saw inflows. UBS Global Wealth Management suggests near-term volatility will persist but advises investors to maintain long-term plans, expecting tariffs to weigh on growth and inflation but not derail the U.S. economy or the broader equity rally.

Analysis

U.S. investors executed a significant risk-off rotation during the week ending August 6, driven by new trade tariffs and deteriorating economic data. This flight to safety is quantified by a net withdrawal of $13.7 billion from U.S. equity funds, the largest weekly outflow since June 25, and a simultaneous record allocation of $78.85 billion into money market funds, the largest since December 4. The aversion to equity risk was broad, with small-cap funds experiencing their largest weekly net sales since December 18 at $5.2 billion, alongside substantial disposals from large-cap ($7 billion) and mid-cap ($1.71 billion) funds. Concurrently, demand for fixed income surged, with bond funds attracting an 11-week high of $7.39 billion, concentrated in short-to-intermediate investment-grade and government debt. Despite the widespread equity exodus, sectoral funds registered net inflows of $806 million, led by communication services and industrials, suggesting a selective rather than indiscriminate sell-off. According to UBS Global Wealth Management, this volatility is expected to persist in the near term, but their base case anticipates the U.S. effective tariff rate will settle around 15%, a level that would weigh on growth and lift inflation but not fundamentally derail the U.S. economy or the broader equity rally.

Key Decisions for Investors

• Given the significant outflows from equities, particularly small-caps, investors should assess their portfolio's sensitivity to trade policy and consider reducing exposure to the most vulnerable segments.
• The strong inflows into specific sectors like communication services and industrials suggest a search for resilience; it may be prudent to identify and rotate into sectors with defensive characteristics or secular growth stories.
• The record flows into money market funds and high demand for short-to-intermediate term bonds signal a strong preference for liquidity and safety; consider increasing allocations to cash-equivalents and high-quality fixed income to hedge against further volatility.
• For those with a longer time horizon, the market's reaction could present opportunities to accumulate positions in line with UBS's view that the broader economic and equity rally will not be derailed, despite near-term headwinds on growth and inflation.