The market pullback this morning is as right as rain here on California’s central coast. When it comes, it is both expected and needed. No one need panic …
This weekend, I came across some chatter that is now speaking to the idea that the recent flow of money from retail investors into mutual funds is not necessarily good for the market.
- Despite all the ballyhoo over money flowing back into stocks, the return of mom-and-pop investors means little to how well the market performs this year.
Is that so? And how is it that you arrive at this conclusion my contrarian friends?
- When retail investors think it’s all blue skies out there, we could all too well be looking for a big pullout. It’s very counterintuitive.
Well, that is not evidence. How about something concrete, other than a stale market maxim?
- During the height of the tech bubble in 2000, when retail investors were really embracing stocks, a staggering $42.7 billion flowed into equities in January of that year, double the amount that flowed in this January. That didn’t end well, as stocks peaked in March of that year before dropping over the next two-plus years
Not bad, but isn’t your comparison a bit of the apple/orange thing? After all, in 2000, we were just coming off the greatest tech boom of all time and heading into a recession. Consider the fact that the opposite is true today. We have no specific mania driving valuations to ridiculous highs. Sure, we can quibble about the S&P 500 valuation or the DIJA valuation, but that would be quibbling. Back in 2000, no one quibbled about valuations. Everyone understood they were fundamentally unsound, but no one cared. We call that a mania (think tulips). Would anyone call the market behavior today manic when looking at the important market valuations?
- Individual investors rushed into stocks and bonds in January, setting the stage for the biggest month on record for deposits into U.S. mutual funds. Long-term funds, which exclude money-market vehicles, attracted $64.8 billion in the first three weeks of the month, according to the Washington-based Investment Company Institute.
It is true, a HUGE amount of money is flowing into the market, whether it be in stocks, bonds, or other asset classes, but remember, there is much more money still out there. Oh, and speaking of money markets regarding your contrarian thinking …
- Dead money in zero-yielding money markets, meanwhile, was little changed near $2.7 trillion.
No one is rushing from money markets into the stock market. This tells me 1) there is still a certain amount of skepticism out there, thanks to US politics, Europe, and a soft US economy and 2) a huge amount of money could still move into equities when the above goes away.
I don’t know. Simply using an historical event (tech/market bust 2000) and a tired contrarian maxim to make a point is not convincing. I mean, the market is a different creature than it was back then. True, we did see a similar inflow of money back in 2006 and 2007, but that was real topping, just like the topping in 2000. I mean, talk about irrational exuberance. Everyone wanted on the train as it headed for global economic recession and a market collapse from a loss of financial fundamentals (to put it mildly). This time it is different. Despite December’s slight contraction in US GDP, I, as well as many others, doubt that the US economy is headed backward (all things being equal). As well, many argue that Europe has hit bottom and China is certainly on a positive economic upswing. No, whereas in both 2000 and 2007, one could see imminent recessions and real bubbles, today that is not the case. Sure, the market has issues, but those issues revolve around uncertainty.
The point to keep in mind is this: lots of money is flowing into the market via mutual funds and that money will be invested, most likely each time the market pulls back. As well, though, there are critical issues to watch, such as a failure of the US politicos to modify the sequestration spending cuts coming March 1, another threat to not raise the US debt ceiling in May, geopolitical events leading to greater war in the Middle East, or a sudden move up in inflation.
Actually, the latter could prove helpful to a market that wants to go up. If inflation jumps up, that might be the motivator to move some of that $2.7 trillion of dead money earning nothing in money market funds into the equities market. Then, we night see a bubble forming. Then, that stale maxim about retail investors pouring into the market signals an imminent market decline just might become a little fresher. For now, though, let’s keep our eye on the ball, or in this moment, Europe.
- Markets learned in late January that the European banks are stronger than regulators and investors thought. This is so important because there has been an improvement in funding and liquidity conditions in Europe. This is what Europe needed to get right before GDP growth can turn around. Their banks are in better shape than expected, the risk of a collapse in the Euro has diminished, the risk of a contagion stemming from losses in European banks is declining, and the overall system default risk is less.
Trade in the day; Invest in your life …
