Where Is The Little Guy Putting His Money?
Investor optimism towards equities continues to improve. For the week ended
August 6, AMG data is reporting that equity funds–including
those that invest abroad–witnessed net cash inflows of $359 million. 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 ($813) million. Year to
date, equity funds have reported inflows totaling $49.7 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 $3.6 billion for the week
ended August 6. And of this total, $2.6 billion came out of junk bond funds,
which explains, in large part, the mixed performance of the high yield market
this week. Aggregate inflows for this year however, total $88 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 during periods of extreme inflows/outflows, such as in 2000 and last October.
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Keeping an eye on junk bonds
The speculative grade (junk) index is still not showing any signs of
panic. Nevertheless, investors need to keep watching this market over the next
few weeks until we can determine what effect the Treasury sell-off has had on
the institutional investor community. Again, so far, I am not detecting any sign
of panic from the credit markets, but I’ll continue to report any development to
readers.Â