Friday, September 7, 2012

Investors Continue to Flee Stocks Despite the Rally

Merrill Lynch global strategist Michael Hartnett wrote the following in his strategy piece this week:

Today, Nasdaq closed at the highest level since Dec '00 and {the S&P 500} closed at highest level since Jan '08.  And yet, weekly flows show largest equity outflows in 2012.

Investors have simply not been positioned for a rally.  They remain more willing to take risk in fixed income, which we think in in the early stages of a bubble.

This truly has been a hated rally.  Bears offer a multitude of reasons why stocks should be sharply lower, but the relentless rise of the market has thus far proven them wrong:


With the exception of the market swoon in May, stocks have moved steadily higher this year, and the S&P 500 is up  +15.6% through yesterday.

Yet the drumbeat of negative newsflow and commentary continues.

This has been a consistent theme since the credit crisis of 2009.  Investor focus has been mostly on what can go wrong, rather than what might be working.  Most would probably surprised by just how well stocks have done - doubling in a little over three years time.

However, as the blog Business Insider writes, valuations in general are actually a little cheap to historic averages:

The S&P 500 is trading 13 percent below its average valuation since the 1950s and its price-to-earnings ratio has fallen throughout the rally since 2009, according to data compiled by Bloomberg. The benchmark gauge for American equities trades at 14.51 times reported profits, down from the 24.26 reached in December 2009, the data showed.

And yet, as the article continues:

Even as the S&P 500 doubled, investors pulled money from mutual funds that buy U.S. stocks for a fifth year in 2011, the longest streak in data going back to 1984, according to the Investment Company Institute, a Washington-based trade group. Withdrawals were $135 billion last year, the second-highest total after 2008, and about $75 billion has been pulled in 2012.

Although I do not have any hard data to support this, I think there currently is an inverse relation between an investor's age and the way they view the stock market.

Younger investors - which I define as under the age of 40 - see the stock market either as a trading vehicle or something to avoid altogether.

This is not surprising, in a way:  After the strong gains in 1980's and 1990's, stocks have been mostly in a broad trading range.  The S&P, for example, has traded at around 1550 twice over the last 12 years (in 2000 and 2007) only to pull back sharply each time.

Older investors, on the other hand, survey the current investment landscape, and tend to see stocks as really the only viable investment for anyone with a longer term time horizon.  Buying bonds, or holding funds in reserves, may feel right on certain days, but the odds overwhelmingly favor the stock market in most scenarios.

And, given the fact that I am, ahem, well into my 50's, you can guess which camp I fall into.