some preliminaries…
A little more than a week ago, I wrote a post I called “Thinking about 2011,” in which I discussed the economic and stock market forecast of Jim Paulsen of Wells Fargo. My understanding of his position is that the US economy is much farther along the road to recovery than one would imagine from the doomsayers of the “new normal.” In fact, judging by the experience of the past twenty-five years, this recovery is ahead of schedule, not behind. More than that, things are about to pick up all by themselves.
If so, the soon-to-be-launched quantitative easing by the Fed is not only unnecessary, but it has the potential for creating a lot of inflation–fast.
I said I thought Mr. Paulsen’s analysis was far from consensus. My friend Bart, a canny veteran still working on Wall Street, wrote a comment to my post saying that Paulsen is a lot closer to the thinking of institutional investors than I realize. Although confident that Bert is correct, I replied that I didn’t see this consensus being acted on yet in stock or bond prices.
…bringing us to yesterday morning
Monday’s Financial Times contains an article with a London byline titled “Investors increase exposure to equities.” The story references two data providers: the Investment Company Institute, the trade association of the mutual fund industry in the US; and EPFR, a Cambridge, Massachusetts-based data aggregator that I’m not familiar with.
According to the FT, EPFR says funds that invest in US equities have had inflows of $13.3 billion since the beginning of September. Funds focussed on Europe have taken in $1.2 billion over the same time span. Last week alone, the inflows were $2.7 billion and $840 million, respectively.
The ICI maintains the official figures for mutual funds based in the US (which may be a slightly different universe than EPFR’s). These data don’t clearly support the EPFR statements. What they do show, however, is that in mid-October, redemptions of US-oriented equity funds suddenly slowed from a flood to a trickle. At the same time, inflows to international funds began to accelerate.
I tried to contact EPFR this morning, without success. By the way, I’ve been pleasantly surprised to find how uniformly cooperative the information sources I contact as an equity market blogger are. I expect I’ll eventually hear from EPFR as well. Whether I do or not, though, the point is still that we may have seen an inflection point in investor behavior.
What does this mean?
The change in money flow may mean nothing. Or it could reverse itself in short order. After all, at least according to the ICI data, bond fund inflows haven’t diminished a bit.
On the other hand, government bonds have been weak recently, as have bond-like domestic US stocks.
My hunch is that world stock markets may be in the process of changing their character in a meaningful way and that I don’t have the two months for leisurely thought that I thought I had, if I want to keep positioned in stocks with a good chance of outperforming.
The first thing to consider is what kinds of stocks might be vulnerable if:
–economic growth is picking up steam,
–interest rates are rising, and
–inflation may be a problem, meaning the Fed has got to see to it that rates rise some more.
At this point, I still need to be convinced that any of this stuff is really going to happen. And I don’t want to launch into an overhaul of my positions without thinking about it carefully first. All I want to do is to identify potential underperformers and figure what I would need to do to get from overweight to a more neutral position.
I’ve also been thinking that many of the same stocks that have done well over the past eighteen months also stand to be outperformers in a higher-growth, more inflationary world. But I want to make sure of that, too.
More on this topic over the next few days.