The Fed has slashed rates, bailed out insolvent US banks and reliquified the financial system by initiating a gargantuan US dollar carry trade. But the retail US investor has, so far, adamantly and tenaciously refused to take on any equity market risk.
In fact, even as the stock market roared higher, they’ve been furiously paring their equity holdings and instead have been funneling their money like mad into bonds. We first looked at this phenomena back in September (Equity Mutual Fund Outflows - After 60% Rise!) and then again last month: What If Wall St. Threw A Party, And Nobody Came?
Before we try to understand the significance of this, first, let’s update the fund flow data:
The data point for November is partial but you can clearly see that the trend continues unabated. This peculiar behavior can be interpreted two ways. In the short term, it is bullish from a contrarian point of view. In the long term, it is very problematic as the bull market obviously needs fuel. Every major bull market has run on the self-sustaining virtuous cycle of retail fund flows.
So far, this melt up has been propelled by short covering, institutional buying, hedge fund momentum chasers and mutual fund managers using up their cash holdings. Judging from this and the collapse in CNBC viewership, the average US investor couldn’t care less about stocks. I’m curious if this will reverse next year as mutual funds start to advertise their glowing performance numbers for 2009.
What if this is a secular shift, as many claim? Are the baby boomers seeking the safe haven of bonds because they think time is not on their side if they would be in equities? Seen this way, their sudden penchant for fixed income is understandable. Nevertheless, based on solid historical precedent, today’s bond investors will be disappointed.
Before we can declare the cult of equities over and before we can point and laugh at the retail investors for losing their shirts in equities and then piling into bonds at the most inopportune time, we have to give them credit for one thing.
While US retail investors have been selling into the spring rally, they haven’t completely written off equities as an asset class. In fact, they’ve been dabbling in foreign equities quite a bit. Since April 2009, every single month, including November, has seen positive flows.
Compared to the amounts involved in bonds or domestic equities, we’re talking peanuts. But for a change, retail investors look rather astute. That’s because emerging equities have displayed an impressive relative strength. Measured from the low in October 2008, the March low and year to date, emerging markets (MSCI Emerging Markets index) have delivered solid returns; even besting gold.
Giving the Finger to Wall Street
So it looks like retail investors have had it with the equity market in the US. But claiming that they have developed a sudden aversion to all equities or that “the cult of equities is over”, as Rosenberg did recently, is a bit of a stretch.
From the March 2009 lows up to the most recent data, US equities saw withdrawals of almost $26 billion while foreign equities saw an inflow of $33 billion. And of course, dwarfing both was the fund flow into bonds (taxable and municipal) of $314 billion. I think Jane and Joe Public are trying to give Wall Street a message.
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