Another Equity Bubble?
According to AMG’s
latest mutual fund flow report, investors’ enthusiasm for equities
continues to build momentum, but not at the expense of fixed income funds.
Equity Allocations Shows
Growing Momentum In Investor Risk Appetite
Stock allocations gained for a third straight
week, albeit at a slower pace. Specifically, Equity funds reported inflows
totaling $2 Billion for the week ending 11 June 2003 (down from last week’s
$2.8 billion). Small cap funds continue to be the fund of choice, as $596
million made its way into this more speculative segment (up from $388 the week
before). Â
International funds–primarily emerging markets
and Japan–continue to report significant inflows. Incidentally, the Nikkei 225
stock index is in the midst of its longest weekly rally in years Readers may
recall a few weeks ago, I pointed out that certain risk-averse institutional
investors, namely Calpers, have been committing financial capital to Japanese
equities. Indeed, positive signs are emerging from Japan that its economy may be
ready to turn the corner to growth. However, the US equity markets still offer
more attractive opportunities for investors at this time, in my view.
Bond Funds Continue to Report
Positive Inflows
Investors allocated $2.4 billion to bond mutual
funds for the week ended June 11 (the same amount as last week). Most of the
inflows, however, went into funds that invest in high yield bond funds, as
$1.33 billion made its way into this fund sector. Elsewhere, $628 million was
allocated by investors to investment grade corporate bond funds.Â
Money market funds reported outflows totaling
$914 million.
Comments
Many market observers continue to believe that
the “reflation” directive adopted by the Fed in its accommodative monetary
policy is creating a bubble in the equity markets. However, when one considers
the current relationship between the Wilshire 5000
(
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PowerRating) (the broadest
measure of the US equity markets), and the money supply (measured by Money with
Zero Maturity–MZM) the equity market is clearly no where near the bubble
proportions reached in 2000. In fact, MZM as a percent of the equity markets is
a historacally high levels–62% to be exact, which is the same level seen in the
late 80’s, as evidence in the chart below.
