On occasion, I come across interesting and — inadvertantly telling — stuff in the Personal section of the Journal.
Today was one of those examples: A column titled Individual Investors Shift Assets to Stocks discussed the big influx of funds into equities by retail investors in January:
"Individual investors are moving into the stock market at a stronger clip than seen in years.
The number of trades by individual investors has risen substantially at discount brokerage firms in recent months and jumped an estimated 30% to 40% in January from December. The discount firms, which offer lower-priced trades, also report that money flowing into stock mutual funds last month was at a near record level. Charles Schwab Corp., for example, saw $4.5 billion flow into its stock mutual funds last month, the highest amount since February 2000, when net investments hit $4.7 billion."
This is important for several reasons. Ask yourself this question: Are retail investors more likely to "pile into" equities at the very beginning of a Bull Market, or at the tail end of a Bull Market?
The answer is given a few paragraphs down:
"Rallying markets have piqued interest. The Dow Jones Industrial Average is up 3.92% so far this year. Yesterday, stocks rose strongly despite a report that the consumer price index jumped 0.7% in January from the previous month. Investors took heart, however, because the key inflation measure was up just 0.2%, excluding the volatile energy and food indexes. The Dow Jones industrials rose 68.11 points to 11137.17, its highest level in nearly five years."
So once again, we see that the little guy is late to the party. Its no surprise when we look at the headline news and data: The drumbeat of rally news about the Stock Markets at 5 year highs, the inflation "spin" (see above), the positive data recently on Retail Sales and on Home Construction. Nevermind that these were weather related temporary aberrations, the headlines were net Bullish.
This is how sucker rallies draw people in — and tis also how tops get made. Once the most naive and least informed buy in, who else is left to drive prices higher?
Retail investors are being drawn to stocks partly because of weakening returns from some other investments such as real estate and bonds, which have suffered as the Federal Reserve continues to raise short-term interest rates. Indeed, net inflows into bond funds so far this year are only half of what they were a year ago. Even investors’ appetite for cash-like investments appears to be waning, despite yields of as much as 4% or even higher. Assets in money-market mutual funds, for example, were up only $4.1 billion last month compared with average January inflows of $33.4 billion for the past 10 years, according to iMoneyNet.com.
Let’s review: Sit in cash when yields are practically zero, move out when yields are over 4% (6 mo CDs are paying 4.5%). Cut back on Bonds once their yields become attractive.
Another example of chasing last year’s performance: retail investment in International funds: "Much of the interest in stocks appears to be going overseas. International equity funds, a sector that represents only 15% of total assets among all stock mutual funds, captured about 80% of the inflows into stock funds so far this year, according to AMG Data Services of Arcata, Calif. . . Foreign stocks’ appeal stems in part from their recent superior performance."
Finally, ket’s have a look at prior such pattenrs of retail enthusiasm:
Domestic retail trading volumes have steadily climbed since hitting a low in February 2003, according to an analysis by Sanford C. Bernstein & Co., a unit of Alliance Capital Management LP, and are approaching levels last seen in 2001 before the market crash. Although active traders were the first ones to return to the market, "now we’re beginning to see the core investors come back — the families, the 40-year-olds with kids and retirees," says Bernstein senior analyst Brad Hintz . . .
The discount brokerage firms, which represent an estimated 8% of all
retail commissions, say they are seeing a record level of activity, and
many of them are rolling out promotions offering free trades and cash
back to get investors to open accounts. OptionsXpress Holdings Inc.
reported a record level of trades, new account openings, and assets
last month. At TD Ameritrade Holding Corp., trades from just the
Ameritrade business, which recently merged with TD Waterhouse, were up
32% last month from December, the second highest month-to-month
increase since 1999. (The previous peak was January 2004, when trading
volume rose 44%.) Online brokerage firm ShareBuilder Corp. says it
opened more than 40,000 new accounts in January — the highest number
The lowest level of retail participation: February 2003. That was a month before the Iraq Invasionbegan, and turned out to be an ideal time to purchase equities. Indeed, that was the best time to make buys since the market topped in 2000.
The worst time? Well, the last surge in retail stock purchases in 20011 turned out to be amongst the very poorest time to make new purchases.
I trust that this comes as no surprise to those of you who pay attention to these sorts of things. Technology changes, new companies open, new fund managers garner the spotlight. All manners of related items shift, morph, refocus change.
The only thing that is timeless is Human nature. That song forever remains the same.
Individual Investors Shift Assets to Stocks
Brokers Report Near-Record Trading Activity,
Investment Flows; Moving Out of Real Estate
JANE J. KIM and JEFF D. OPDYKE
WSJ, February 23, 2006; Page D1
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