Monday, July 30, 2012

Investor Sentiment Remains Sour

Remember the axiom of "Sell in May, and Go Away" that was being repeated last April?  So far, at least, this advice has been not helpful:


Investors are understandably cautious in their approach to the stock market.  Despite historically low levels of interest rates, individual investors continue to flock to bond funds rather than stocks.

Nearly $10 billion left equity funds last week - the largest outflow in 2012.  Bond funds received almost $4 billion during the same period, mostly in high yield and emerging market debt.  This is consistent with the pattern for the last 5 years.

Here's how the Wall Street Journal described current investor sentiment:

Investors, particularly individual investors, haven't been convinced by the 2012 rally. They've bailed out of U.S.-stock mutual funds in droves—withdrawing $71 billion so far this year, according to the Investment Company Institute, the mutual-fund industry's trade group.

Bullish investor sentiment, as measured by the widely followed American Association of Individual Investors survey, was at its lowest in two years in the week ended July 19, before rebounding somewhat last week. Bearishness, meanwhile, is near recent peaks.

"There's this unbelievable disconnect between what the stock market is actually doing and the psychology of investors," says Liz Ann Sonders, chief investment strategist at Charles Schwab.

In another article published by the Journal over the weekend, veteran market strategist Byron Wien commented on investor sentiment:

Today, Mr. Wien says that stock trading has replaced investing, with the average holding period for stocks going from eight years in 1960 to seven months today. "I think the public feels that professionals have taken over the market and the playing field isn't level for them," he says, adding that as a result many investors in recent years have piled into bond funds where they perceive a better deal. "And the only thing that would change that is if the stock market started to perform very well again. Then they would feel that they're missing something. Right now they don't feel they're missing anything."

Yet Mr. Wien believes that they are missing something. He says stocks are likely to outperform bonds, and he thinks that a lot of investors will get over their concerns about the financial system once the market is rising again. Part of his optimism lies in the fact that he isn't sure the system is as rotten as it may seem.

Changing investor sentiment will not be easy, especially in the wake of a steady drumbeat of negative news reports from Europe and our own country.

My best guess is that when interest rates begin to rise, and the risks in bond mutual funds become apparent, investor attitudes will change.

However, given the fragile state of the U.S. recovery, and the very precarious state of the euro, a significant rise in interest rates seems some months away.