Domestic stock funds last week suffered their worst week since before the financial crisis as investors' fears over the Federal Reserve's plan to cut its asset- purchasing program spread to stocks.
More than $14 billion was pulled out of U.S. stock funds this week, the most in a single week since June 2008, according to Bank of America Merrill Lynch.
“The retail public still doesn't trust this rally,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates Inc. “They think you need a feel-good environment to get a secular rally but the reality is when it's a feel-good environment, you're usually late to the game.”
The S&P 500 is down almost 3% since the beginning of August, although it's still up more than 15% year-to-date. The pullback gained steam, ironically, after a report that initial jobless claims had fallen to their lowest level since before the financial crisis. That fit in perfectly with the consensus opinion that the Fed would begin to taper its asset purchases at its September meeting.
The uncertainty surrounding tapering, both how it would work and when it would start, sent the interest rate of the 10-year U.S. Treasury to 2.89%, its highest level since August 2011.
The rise in interest rates sent bond investors rushing to the exits, pulling out more than $30 billion month-to-date through Aug. 19.
Greg Sarian, managing director at Sarian Group, a private wealth team at HighTower Advisors LLC, started talking to his clients about moving into cash in late July.
“When the market hit new highs in July, we thought it was time to pick the fruit while it's ripe,” he said. “It's been a good year. Clients are much more aware of protecting profits than ever before.”
Strategists agree there may not be a lot of good news coming from the stock market in the short term.
With earnings season over, sequestration starting to take a bite out of economic statistics, a jump in interest rates, and concerns coming from the emerging markets, there's not a lot to drive the market forward anytime soon.
“There is a dearth of catalysts right now,” Mr. Saut said. “The fact of the matter is, the market's internal energy is gone near-term.”
Scott Wren, a senior equity strategist at Wells Fargo Advisors LLC, agrees there's not a lot to get excited about over the next few months.
“We'd argue the gains are in for the year,” he said.
Mr. Saut said this current pullback could run as much as 10% in total, but he doesn't think tapering, if it is announced next month, will cause any kind of bear market.
“I personally think it's going to be a non-event,” he said. “Usually, when everyone's asking the same question, it's the wrong question.”
Mr. Wren is also still bullish over the long term. He has a target of 1,850 for the S&P 500 at the end of 2014. It closed at 1,656 on Aug. 22.
With that in mind, he's using this pullback as an opportunity to push clients into stocks.
“We have lots of clients with a lot of cash who have missed a lot of this run,” Mr. Wren said. “We'd love to see the market pull back a little more and then we'll be in there pounding the table.”