I am back from my four-day sailing trip to the San Juan Islands in Washington’s Puget Sound. As of last night, I had full Internet, almost solid cell reception (another story for another time) and “unlimited” power. I have to be honest, it felt good to be back in the wireless world, but, as I am being honest, I also needed to experience the feeling of letting go, which is what one should do when one can do nothing to change the current environment. Fretting and worrying only make matters worse. Letting go felt good …
- Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months.
Letting go is not something individual investors are doing right now, as the above stat points out. Nor are they ready to let go, as the stat below suggests.
- Investors added more than $19 billion in new cash to U.S.-based stock and money market funds in the latest week as the second-quarter earnings season kicked off.
Yet, herein is the counterintuitive nature of market analyses – when the money flows in from those who have the most fear of the market, the analysts predict the demise of the market. A strong inflow of money from individuals must mean the market’s demise because folks such as you and I are always late to the party. We have so much fear that we wait until the train is plowing down the track at full speed before jumping on. It is only then our fear of getting on board converts to a fear of not getting on board.
- While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally.
And here it is – once we jump on with all of our money, the added weight shifts the balance and the train slows down considerably or it crashes.
The thinking goes that the individual investor plows money into mutual funds because he or she becomes irrationally exuberant in bull rallies. Those who predict market movement on such a basis will point to 2000 to make the case.
- The bursting of the technology bubble in March 2000 was marked by mutual funds absorbing a record $102 billion in the first quarter.
Granted, the tech boom of the 90s and ensuing “irrational” market rise both consisted of plenty of hot air to make a bubble. Today, however, the technology of those heady days is now integrated into the commercial stream. Businesses are making money, and plenty of it, because of technology. Back then, Amazon was trading for high dollars years before it made its first dime. My point being, one has to find me that “irrational exuberance” in today’s market before I believe a comparison to the market of 2000 is valid. As I have stated many times before – the market is about earnings, not predictions based on history, charts, patterns, or bones.
- The track record of equity strategists as a whole shows the difficulty in predicting stock prices. About half of the time, the S&P 500 ended the year more than 10 percent away from the average level predicted by strategists in January, according to data compiled by Bloomberg since 1999.
And we have plenty of earnings coming up in the next two weeks. Importantly, though, the ones that have already come out suggest today’s rise in the market is about earnings. Alcoa and Citi Group have reported solid earnings, as we have seen in the news, but check these out.
- Wells Fargo reported second quarter EPS of $1.01 on revenue of $21.10 billion, compared to last year’s EPS of $0.98 on revenue of $21.38 billion.
- Fastenal Company reported second quarter EPS of $0.44 on revenue of $949.90 million, compared to last year’s EPS of $0.41 on revenue of $847.60 million.
- Infosys Limited reported first quarter EPS of $0.84 on revenue of $2.13 billion, compared to last year’s EPS of $0.73 on revenue of $1.99 billion.
Here is another fact to consider when thinking about the current market relative to 2000, or any other market year for that matter. The VIX back in March of 2000 stood at around 32. Today, it stands at about 11.5, more or less. Individuals might fear missing out on this extended bull rally and so are putting their money in, but institutional investors are not afraid, at least according to the VIX. If you want see how historically valid the VIX is as a correlative metric, look at a chart of the VIX and the S&P 500 from 1989 to today. Yup. Generally, as the VIX rises, the market falls and so it goes in reverse.
The bottom line is this: money is not just flowing in from individuals; it is flowing in from institutions as well and the reason is that the US and global economies are improving and companies are making money because of it.
- Investors will get more clues about the health of the economy during the next two weeks with more than 200 companies in the S&P 500 releasing quarterly results.
Forget about 2000, and forget about analyses based on correlations to the past. We are in a brave new world when it comes to the market. So, if you want to fret and worry about anything, fret and worry about earnings that have not come in yet. Otherwise, let it go, that is let go of your angst about what the analysts say. You can’t change that industry, nor can you change upcoming earnings. If you do let it go, my guess is you will feel better.
Trade in the day; invest in your life …
