I had a great time on vacation with my family last week. "Investing" in family time is always a great idea, and will yield priceless memories!
But now I'm back to thinking about investments.
Yesterday's New York Times had a front page story about investors fleeing the stock market. Here's an excerpt, with the full link below:
Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.
If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.
Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.
But wait. Turning to the Times's business section in Paul Lim's column, you read this:
...while investors have been retreating to government bonds, they’ve also been pouring new money into so-called risk assets like junk bonds, emerging-market debt and emerging-market stocks. With so much attention being paid to the Treasury market, these trends have gone largely unnoticed, Ms. Cohen said.
In fact, this year through Wednesday, a net total of $21 billion flowed into mutual funds and exchange-traded funds that concentrate on stocks based in fast-growing developing economies like China, India and Latin America, according to Lipper, the mutual fund tracker. By comparison, investors pulled a net $8 billion from domestic equity funds, even though domestic stocks are considered a core holding.
Meanwhile, high-yield or junk bond funds — which were crushed in 2008, when investors fled assets that exposed them to credit risk — have attracted around $4.5 billion in new money.
James W. Paulsen, the Minneapolis-based chief investment strategist for Wells Capital Management, adds that, at least in comparison with the dark days of 2008, there are other signs investors aren’t as risk averse as the trend in Treasury yields may imply.
He noted that even though investors seem genuinely concerned about the health of the recovery, two of the best-performing sectors this year have been industrial stocks and shares of consumer discretionary companies, which are both economically sensitive areas of the market.
So what's going on here?
I have a thesis that I will be developing more in the next few weeks. Hopefully this will be helpful in understanding the apparent contradiction in U.S. investors fleeing the domestic stock market in favor of more exotic areas like junk bonds and emerging markets.
In the first part of the twentieth century, investor demanded high dividend yields in return for stock investments. Andrew Carnegie, for example, moved much of the proceeds from the sale of Carnegie Brothers Steel (now called U.S. Steel) into stocks paying a 5% dividend. These stocks were further backed by gold. The shrewd Scotsman would never have put his money into investments that would not fund his extravagant lifestyle.
The thinking was simple: Why should someone give up their hard-earned capital to a corporation without receiving a generous cash dividend in return?
In the 1950's, stocks yielded considerably more than government bonds. If memory serves (again, I need to do more research), stock dividend yields were around 5% while U.S. government debt yielded around 2%.
It wasn't until the 1960's - when stocks enjoyed a huge upswing in the "go-go years" - that investors accepted the notion of lower dividends in return for more capital returns.
So today, investors are either focused on yield (junk bonds) or fast-growing economies (emerging markets).
I think we may be heading back to the era of investors demanding more upfront returns from their stock investments, or at least give some reason for optimism.
And I think what we're seeing in the market today is a reflection of investor frustration with the promises that have been made by corporations that have not panned out in terms of capital appreciation.
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