Floyd Norris On The End Of The American Love Affair With Stocks

Three weeks ago when we noted the 30th consecutive outflow from US-based equity mutual funds (now at 33 straight weeks), we said: "America's love affair with stocks is over, has bypassed the marriage stage and gone straight to the bitter divorce." Today, we are happy to see that the the NYT's Floyd Norris for repackaging our metaphor in a slightly more palatable fashion: "The love affair of American investors with the stock market appears to have ended." His piece in today's NYT "For U.S. investors, the glow is off domestic stocks" will not be news to anyone who follows our weekly report on ICI data: "The year now ending will be the fourth consecutive year in which mutual funds that invest primarily in American stocks experienced net outflows of funds, meaning that investors as a group withdrew more money than they put in." And yet stocks continue to ramp higher, in big part due to the rapid increase in NYSE margin interest which means the bulk of investors are buying stock increasingly on leverage, but still the question to just who continues to do the actual holding remains unanswered. Indeed, only a few people, Charles Biderman among them, have answered with the response that everyone knows is true, yet most are afraid to utter.

As for Norris' observations, which finally bring broad popular attention to this key topic which we have been hammering on for about 33 weeks in a row, here is the gist:

The accompanying charts show that investors took out $81 billion from such funds so far this year, significantly more than they took out in 2009 but well below the withdrawals of more than $150 billion in 2008, the year that Lehman Brothers failed and the credit crisis blossomed.

The withdrawals this year were partly offset by money flowing into foreign stock funds and hybrid funds, which invest in both stocks and bonds. Investors seem willing to trust in overseas markets more than in the American one, and a growing number are choosing so-called target-date funds, in which fund companies promise to choose the right mix of stocks and bonds depending upon when an investor expects to retire.

The figures come from the Investment Company Institute, a trade group of mutual funds that has been compiling the totals since 1984. They include estimates of trades through mid-December.

Before 2007, there had been net withdrawals from domestic stock funds in only two years, 1988 and 2002.

The first of those years came after the 1987 crash, which scared many investors as the market fell more than 20 percent in one day. But it recovered all of that loss and more in 1988, and many investors learned from that experience that market declines presented buying opportunities, not reasons to sell. The assumption that stocks were sure to rise, at least in the long run, became widely accepted.


For the 10 years through 2010, figures for the final two weeks of the year will determine whether there was any net investment in domestic stock funds. (The estimate for the decade so far is that $4 billion flowed out.) By contrast, in the 10 years before that, Americans put $1.3 trillion into such funds.

In some ways, the current mood is reminiscent of the one that prevailed then. In 1979, Business Week published a cover article on the “Death of Equities,” which it attributed in large part to rising inflation. By 1982, inflation had begun to fall, but the country was in a deep recession. That is when the great bull market of the 1980s began. Few investors seem confident that such a renewal of optimism is likely this time.

But if the bolded sentence is true, it means that everything we hear on CNBC is a lie... After all, if the surge in the market is not sufficient to inspire confidence that the economy is improving, and that in turn is not sufficient to get people to start investing in stocks again, then isn't the whole premise of restarting the virtuous cycle via QE X also fatally flawed? "Give it time" the optimists will say. Any week now there will be an investment in stocks. Fair enough, but that means rates will start to trickle ever higher, and every 1% rise in rates is equivalent to a 10% drop in home prices... Not to mention that the accompanying rise in commodity prices, most notably oil, will wipe out every last fiscal stimulus implemented in the past year and result in a crunch in profit and net income margins, once prices are unable to be passed through, destroying all hopes of an S&P 2011 EPS in the mid 90s. In retrospect we feel bad for Bernanke: at this point even the blind can see just how massive of a catch 22 the Chairman has boxed himself into, whereby every incremental dollar of monetary "stimulus" just raises the sword of Damocles a few inches higher.