No Signs Of Complacency Here
Investor sentiment towards equities remains cautious, as measured by the most
recent fund flow data. For the week ended July 30, AMG data is reporting that equity funds–including
those that invest abroad–witnessed net cash outflows of $414 million, which is
a net decline of $3.6 from the prior week. Within this category, investors were
net sellers of mutual funds that invest in global equity markets and net buyers
of mutual funds that invest in the US equity markets ($507) million. Year to
date, equity funds have reported inflows totaling $49.3 billion–which is quite
modest considering that during the first half of the year for the past five
years, equity funds have reported average inflows of $70 billion.
Taxable bond funds witnessed outflows totaling $1.9 billion for the week
ended July 30, which is a net decline of $3.4 billion from the previous weekÂ
Aggregate inflows for this year however, total $91.6 billion, which is
dramatically more than the amount reported during the same period in 1998
(+$44b), 1999 (+$20b) and 2000 (-$60b). The fact that investors continue to pile
into bond funds hardly suggests euphoria towards stocks.
A sustained trend in outflows from bond funds into stock funds would signal
capitulation by cautious/bearish investors, which, in my view, would then
suggest that caution should be exercised by equity bulls. Until that time
however, there is still plenty of money on the sidelines–not only on the part
of retail investors but also on the part of pension and foreign investors–to
feed further gains in the S&P 500.
The chart below illustrates periods of extreme shifts in mutual fund flows
relative to the Wilshire 5000 and has been a good contrarian market
indicator, such as in 2000 and last October.
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