There’s been a lot of press recently about investors suddenly waking up after four years of strong market gains and deciding to take their money out of “safe” fixed income investments and put it into stocks.
What’s implied in many of these articles is that this flow is what’s putting the recent zip into the S&P 500. What’s also implied, and sometimes stated, is that this is the “dumb money” whose arrival on stage is a signal that we’re entering the closing act of the current bull market.
Both implications might have some truth to them. But neither is anything like the full story. Most people are a lot smarter than that. Money flows are a lot more complex.
This is what I see:
1. Any money going into stock market mutual funds or ETFs is not coming out of bonds. Bond funds have had large inflows every month since January 2009, except for tiny outflows in December 2010 and August 2011.
Money coming into bond mutual funds accelerated in 2012, to around $25 billion a month, according to the Investment Company Institute, the mutual fund trade organization.
2. Bond inflows have been matched by steady though smaller, outflows from stock mutual funds. The lost stock mutual fund money may be feeding part of the bond buying binge. But there are also two important trends within the equity world.
–There’s a big multi-year shift away from actively managed equity mutual funds toward index ETFs. Two reasons: better performance, and lower costs. ETF flows are clearly much healthier than equity mutual funds’.
–Virtually all the net equity mutual fund outflows have been coming from US-only funds. Global, international and emerging market mutual funds have been at least treading water. Similar ETFs are seeing large inflows. Again, this has been happening for years.
3. So far in 2013 over $60 billion in net new money has come into equity mutual funds, breaking an almost two-year stretch of outflows. Two-thirds of that has gone, as usual, into global etc. funds.
Much more interesting, to my mind, but almost completely unnoticed, is the HUGE outflow of over $112 billion from equity funds that occurred last year, from August through December.
Why this rush to the door? My guess is that this is the final shoe dropping from the stock market collapse of the Great Recession. In my experience, some investors will panic and sell at the bottom. Others will nurse their wounds and refuse to sell until they get back to breakeven. Then nothing on heaven or earth can persuade them not to take their money and run. I’ve turned around two woefully underperforming global funds for two different organizations. In both cases, this sort of almost inexplicable outflow was the last step in the healing process.
If that’s what happened during the second half of 2012, it’s a significant bullish sign for stocks.