U.S. equity funds experienced heavy selling for a second consecutive week as escalating tensions involving Iran and disruptions to global oil flows rattled financial markets, triggering renewed fears that the world economy could be heading toward a period of stagflation.
Investors pulled a net $7.77 billion from U.S. equity funds in the week through March 11, adding to the $21.91 billion withdrawn in the previous week, according to data compiled by LSEG Lipper. The two-week exodus of nearly $30 billion underscores how rapidly sentiment has deteriorated as geopolitical tensions spill into commodity and financial markets.
The selloff coincided with an extraordinary surge in oil prices after Iranian attacks on energy infrastructure and tankers across the Middle East intensified fears of a prolonged disruption to global supply chains.
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U.S. crude prices jumped 9.7% on Thursday alone, pushing month-to-date gains to nearly 43%. The rally has been driven by what traders describe as the most severe disruption to global oil flows in modern history, with shipping activity across the Gulf region grinding to a near halt.
The turmoil has centered on the strategically critical Strait of Hormuz, a narrow shipping corridor through which roughly one-fifth of the world’s oil supply normally passes. With tanker movements slowing sharply and insurance costs for shipping in the region surging, traders warn that supply bottlenecks could persist even if the conflict stabilizes in the near term.
The rapid rise in crude prices has already triggered fears of a fresh inflation shock at a time when central banks were beginning to gain confidence that price pressures were easing. Energy costs are a critical driver of inflation because they ripple through the entire economy — affecting transportation, manufacturing, agriculture, and household expenses.
Equity Markets Face Renewed Pressure
The surge in oil prices has weighed heavily on investor sentiment toward equities, particularly as higher energy costs threaten to squeeze corporate profit margins and reduce consumer spending power.
Large-cap U.S. equity funds recorded $20.98 billion in net outflows during the week, accounting for the bulk of the selling. Mid-cap funds saw redemptions of about $405 million while small-cap funds experienced modest outflows of $8 million. The breadth of the withdrawals suggests that investors are reducing exposure across the market rather than simply rotating within equity sectors.
One notable exception was the multi-cap segment, which attracted $9.32 billion in net inflows. Analysts say the inflows likely reflect institutional investors shifting toward diversified strategies that can navigate volatile market conditions more effectively.
Fund flow data also highlighted a continued shift in investment strategy. Growth-focused funds — which typically hold technology and other high-valuation companies — saw $4.48 billion in net withdrawals.
Meanwhile, value-oriented funds attracted $2.91 billion in inflows for a fifth consecutive week.
The rotation is believed to indicate a classic market response to rising inflation and interest rates. Value stocks, which often include energy, industrial, and financial companies, tend to perform better during periods of commodity-driven inflation. Energy companies in particular stand to benefit directly from higher oil prices, prompting investors to rebalance portfolios toward sectors more closely linked to commodity cycles.
Bond Funds Remain A Refuge
While equities experienced significant withdrawals, bond funds continued to attract steady inflows as investors sought relative safety amid rising market volatility. U.S. bond funds recorded approximately $8.21 billion in net inflows during the week, extending their streak of gains to ten consecutive weeks.
Short-to-intermediate government and Treasury funds led the inflows, attracting about $4.05 billion — the largest weekly intake for the category since late December. Short-to-intermediate investment-grade funds received roughly $2.77 billion, while municipal debt funds drew about $614 million.
The continued demand for fixed-income assets suggests investors are positioning for a possible slowdown in economic growth even as inflation risks rise.
Investors have also been building up liquidity.
U.S. money market funds recorded about $1.5 billion in net inflows, marking a fourth straight week of gains as investors hold more cash while waiting for clearer signals about the economic outlook. Money market funds typically become more attractive during periods of uncertainty because they offer stability and quick access to capital while earning relatively higher yields when interest rates remain elevated.
Markets Brace For Stagflation Risk
The convergence of rising oil prices, geopolitical instability, and persistent inflation pressures is reviving concerns about stagflation — an economic environment characterized by slow growth and high inflation. Such a scenario is particularly challenging for policymakers because the tools used to combat inflation, such as higher interest rates, can also weaken economic activity.
The surge in energy prices has already prompted investors to reassess expectations for policy easing from the Federal Reserve this year. If oil prices remain elevated, inflation could stay stubbornly high, forcing central banks to maintain tighter financial conditions for longer than previously anticipated.
For now, financial markets appear to be trading primarily on geopolitical headlines rather than economic fundamentals. The trajectory of oil prices — and the stability of shipping routes through the Middle East — has become the dominant variable shaping investor behavior.
Until there is clarity about the duration of the conflict and the extent of the supply disruptions, analysts say volatility across equities, bonds, and commodities is likely to remain elevated.
Global investors are quick to retreat from risk when energy shocks threaten to upend the delicate balance between inflation, growth, and monetary policy, as the sharp outflows from equity funds in recent weeks highlight.