It has taken them more than three years, but investors may finally be getting over their aversion to stocks.
Two consecutive weeks of net inflows into equity mutual funds this month have drawn the attention of advisers and market watchers, even if they aren't completely sold on the notion that this could represent the start of a reversal of a multiyear trend of net outflows from stock funds.
“This is a very short but very significant change in the trend of asset flows,” said Adrian Day, chairman and chief executive of Adrian Day Asset Management. “I don't want to dismiss the fact that this is a directional turn, but I would also emphasize that we could still finish the month of January with net outflows.”
Data from the Investment Company Institute show $23.6 billion in net inflows into all equity mutual funds during the two-week period ended Jan. 16.
That included $12.8 billion into domestic equity funds. For some perspective, consider that the last time that domestic equity mutual funds finished a month with net inflows was $1.5 billion in April 2011.
From March 2009, when the stock market bottomed out following the financial crisis, through last month, domestic equity mutual funds experienced nearly $400 billion in net outflows.
Meanwhile, the S&P 500 over that same time period gained more than 100%.
Last Friday, the index rose 8.14 points, or 0.54%, to 1,502.96. By closing higher for the eighth-straight session, the index recorded its longest winning streak since 2004.
Unlike some market cycles that have seen retail-class investors jumping in late — a classic indicator of a market that is getting expensive — and participating only at the tail end of a rally, there might be enough factors in play this time around to continue to support stocks.
“The last few weeks, we've seen a lot of indicators that people are getting more bullish, but remember — we've also gone through three or four years of equity market outflows,” said Sean Stannard-Stockton, owner and director of investments at Ensemble Capital Management LLC. “In other words, the equity market inflows could continue for some time.”
Some advisers see a definite change in the mood of investors.
“I think we have been living for the past few years in very uncertain times, and recently, we've had sort of a lull in the kinds of events that cause people to become anxious,” said Elliot Weissbluth, chief executive of HighTower Advisors LLC.
“The period of relative calm has been just long enough to fuel some investor confidence,” he said. “And it will absolutely fuel the market, at least until the next event happens.”
It also doesn't hurt that the S&P 500 has already gained nearly 5% from the start of the year.
“There is definitely more confidence from investors on the equity side,” said Brian Grogan, an Ameriprise Financial adviser operating as Hillerich Grogan & Associates. “Because of what we've been through over the past few years, there will always be a fear of when the other shoe might drop, but right now, people are enjoying the fact that things like the fiscal cliff and the election are now behind us.”
But even as advisers are welcoming the improved investor mood, it isn't expected to trigger a knee-jerk reaction from professionals.
“We definitely see that clients and investors in general are becoming interested in taking on more equity market risk, but we don't advise making wholesale asset allocation shifts,” Mr. Stannard-Stockton said. “If anything, at times like these, we tend to get more cautious.”
For those investors who want to increase their stake in equities, Mr. Stannard-Stockton said it might make sense to focus on specific areas of financial services likely to benefit from the equity fund inflows.
“In general, you want to be going against the flow of equity mutual fund flows, but in this case, we've had multiple years of equity fund outflows,” he said. “There's certainly a tail wind from more people now likely to be putting money into stocks over the next few years.”
RISKY BOND MARKET
That brings up another major driving force of renewed interest in equities: a low-yielding and increasingly risky bond market.
“At some point in the next 12 to 18 months, we're going to see a secular bull market take off in equities, and at the same time, we're going to see bonds go down like crazy, and we're going to see inflation,” said Harry Clark, chairman and chief executive of Clark Capital Management Group Inc.
During the same period that saw huge net outflows from equity funds, $1 trillion was flowing into bond funds.
“Most of the bond funds are humongous, and they won't be able to sell enough bonds fast enough when rates are rising,” he said. “Bond fund investors are very, very, very, very vulnerable.”
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