Posted on 08/28/2002 3:58:16 PM PDT by dgallo51
America’s retail investors made record withdrawals from stockmarket mutual funds during July, as shares hit four-year lows, according to data released this week. The sell-off has been followed by a sharp rally, leading some to argue that it signalled the end of the bear market. Is the worst over?
AMERICA has its public to thank for the great bull market of the 1990s. It was America’s workers who boosted productivity to historical highs and individual investors, piling into stockmarkets with unprecedented enthusiasm, who drove share prices ever higher. And when the going got tough, small investors did not panic. As consumers, they continued their love affair with credit, even after the terrorist attacks of September 11th. And as investors, they kept the markets going up by “buying on the dips”. But, at long last, it appears that at least some of America’s individual investors feel well and truly beaten. In July, investors withdrew a net $49 billion from stock-based mutual funds, according to Lipper, a company specialising in tracking mutual-fund data. This is an all-time record, and the second month in a row in which withdrawals were larger than new investments. Investors appear nervous. July’s net redemptions exceeded by two-thirds the net $30 billion withdrawn last September following a summer of withdrawals capped by unprecedented terrorist attacks on American soil.
What has happened since July is puzzling: American stockmarkets have rallied by almost 20%. Is this because individual investors have returned to shares, or mutual funds? Estimates of their behaviour will not be available for another week or two, but this seems unlikely, given their behaviour over the past few months. Institutional investors may have decided that stockmarkets had fallen too low, or professional fund managers and speculators may have been forced to buy shares to meet short-term investment targets or to adjust portfolios. Whatever the reason for the recent recovery in prices, it cannot last without the support of individual investors. So what they do next is crucial.
As of the end of July, they seem to have decided to sit out the market after experiencing more than two years of stockmarket declines. Some $31 billion was transferred to money-market funds—very liquid funds that are close to cash in their behaviour. They offer little chance for capital appreciation, but also little risk of capital erosion. A further $19 billion was invested in other fixed-income products, mostly bonds.
Certainly, watching the progress of American shares over the past couple of years has not been a happy experience for investors. The three broad American indices have fallen steeply from records set two years ago, even allowing for recent rallies. The Nasdaq index, chiefly made up of once-fashionable technology stocks, fell by around three-quarters from its giddy peak to trough; the broad S&P 500 index fell by more than 40% and even the narrower and, so far, more robust, Dow Jones hit a low more than one-third below its peak. And if this is the average experience, there are plenty who have seen their savings wiped out: employees of the likes of Enron, for example, who put their entire retirement savings into the now bankrupt energy trader.
By selling in July, many small investors seem to be adhering to the converse of the old dictum: “Buy low, sell high”. For net flows have seemed to follow the market’s course. In February and March 2000, as stockmarkets peaked, monthly inflows into mutual funds were five times the average of the previous two years. It now appears as if outflows peaked as stock prices hit a low point. Of course, this is not entirely a surprise, for the two are not unrelated. One of the factors that sustained the rally was the growing amount invested by individuals, which helped send shares ever higher. This was exacerbated by rules about how stockmarket indices were put together. These weighted companies by calculations of their overall market capitalisations, even when they actually had only a limited numbers of shares in circulation. This, in turn, forced index-tracking funds to bid for these few shares, driving them, and the index, still higher.
Optimists who argued that the record withdrawals from mutual funds in July are a sign that markets are ready for a rebound, because the last remaining bulls had left the market, appear to have been vindicated—in the short term, at least. Pessimists, however, fear that individuals will continue to flee the stockmarket, and they maintain that this month’s rally is only a brief respite. They argue that shares, particularly in America, now look overvalued again, particularly as recent economic indicators point to, at best, an anaemic recovery all over the world. Quite apart from so-called technical factors, such as the amount of money being put into pension funds every month, or being withdrawn from other funds by nervous investors, there are fundamental reasons to fear further falls in American stocks.
For one, despite the falls to date, American shares are still quite highly valued in historic terms. For example, the S&P500, the broadest of the three most common measures of stockmarket performance, is currently valued at 38 times historic earnings, compared with a post-war average of 15. Moreover, America is running a huge current-account deficit. If foreigners slow down the rate at which they are investing in America, the dollar will fall, as it has already begun to do. Lastly, markets tend to overshoot. So, even if one believes that stocks are fairly valued, it would not be surprising if they fell again before moving into a recovery phase again.
Copyright © 2002 The Economist Newspaper and The Economist Group. All rights reserved.
What they mean: "Hey! There's supposed to be a sucker born every minute, but we haven't seen one in days! How are all the brokers supposed to support their coke habits if nobody buys their worthless stocks!"
I never left. Buy and hold.
AAMOF, it was just a couple
weeks ago I bought 10,000
shares of a startup.
That's been my strategy as well. Energy companies have been crucified, but now you can actually find stocks that are not in trouble because of Enron or California, that have a P/E less than 5 (sometimes a lot less) and still pay quarterly dividends amounting to 5 - 10% returns.
I read an analyst hit piece on one such company, and after saying that their debt to asset ratio was good, had gobs of cash sitting in the bank, had great cash flow, etc turned around and recommended against the stock! Then, in the very next sentence said that this company did pay out a large dividend every year "if you like that sort of thing". Sheesh.
I bought some of this un recommended stock and watched it appreciate 35% in three weeks. Sheesh indeed.
(In fairness I should say that it went down in the last two days, like most other energy stocks, but it was still 25% above where it was three weeks ago at today's close.)
Time for you to name names. This "PC" type of analyst needs to have his nuts cut off - mach schnell.
I'm sure you've done your homework but I am reminded of the movie Boiler Room.
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