Funds flowing from money markets into equities; bonds get some too

Movement strengthens argument for another leg up for stocks

Apr 12, 2013 @ 2:01 pm

By Jeff Benjamin

Optimism abounds among individual investors, which helps supports a case for another stock market milestone.

As roughly $85 billion moved out of money market funds over the past three months, at least half went into equity mutual funds — a bullish indicator, according to Jeffrey Kleintop, chief market strategist at LPL Financial LLC.

“Through much of March, it looks like individual investors did some buying of stock funds,” he said.

The latest data from EPFR Global shows that for the seven-day period ended April 10, equity mutual funds had $3.13 billion in net inflows, half of which went into dividend-focused funds.

Bond funds over the period had net inflows of $3.52 billion, and alternative-strategy funds extended to 14 weeks a string of consecutive net inflows, with $953 million.

The bigger picture, according to Mr. Kleintop, is that support for stocks is continuing, having now pushed the forward price-to-earnings ratio of the S&P 500 to 15, just north of the historical average P/E of 14.9.

Mr. Kleintop said reaching 15 is telling of the investor mindset.

“For the first time in this rally, we're seeing, with the rising P/E, evidence that investors are willing to bet more on future growth than they have been in a long time,” he said.

And while some might argue that pushing a P/E above historic average levels could be viewed as making the market expensive, Mr. Kleintop pointed out that no post-World War II bull market has ever ended with a P/E below 17.

Even with a fairly lackluster first-quarter earnings season unfolding, Mr. Kleintop said he believes forces are in place to push the Dow Jones Industrial Average beyond the 15,000 mark, from where it is hovering around 14,820.

“The Dow could certainly hit 15,000, but beyond that, I think it will hit 14,000 before it reaches 16,000,” he said. “A pullback of 5% or so might be just the pause needed to restart the rally.”

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