Individual investors have been getting out of US equity mutual funds for most of this year. And the pace of outflows has been soaring recently. Outflows for all of 2012 now stand at $100 billion. Half of that, $50 billion, came out during the last three months. Flight from the funds is not a new trend. In fact, about $134 billion flowed out of equity mutual funds in 2011. What’s really puzzling is that despite these heavy outflows, stock prices have gone up.
What is going on here? I really do not know. I have opinions, but I do not think anyone really knows since investors do not need to tell anyone their reasons for selling. I can think of three reasons why shareholders have been bailing. The most likely reason is they need the money. The second one is they are selling stocks to buy something else, such as bonds. And third, they are selling because they are just scared that stock prices will collapse again.
Let us look at these three explanations one at a time. There are two types of investors who have been selling because they need the money. The first are retirees my age and up. The second are the unemployed.
The nouveau retirees are regularly selling stocks to pay bills. The demographic twist has occurred. There are about 90 million Americans in the retiring baby boom generation,. Their children only number about half of that. So more and more retirees will be selling stocks than their children even in good times would be adding to their retirement accounts. We have been tracking consistent selling of US stocks by pension funds for the past three years for these self-same demographic reasons. How big is demographic selling? Big. Probably at least several billion dollars per month.
As for the unemployed. When you lose your job, obviously you sell whatever you can when you have to. Is it in the billions? Maybe, but probably not more than $1 billion.
The second group of sellers moving from equities could be switching into other asset class. Over the past two years, while $10 billion per month has been leaving US equity mutual funds; a much bigger $20 billion per month has been flooding into bond funds. Even more startling is that an incredible $40 billion per month is gushing into bank savings accounts that basically earn nothing.
So while some of the $10 billion per month stock sales must have gone into bonds, it certainly cannot be anywhere near the main source of the money going into bonds.
The third group of sellers might be those frightened by the risk of lower stock prices. However, I really do not think that is a very big segment, although that is just my guess. I know most Wall Street journalists like to point to a decade of stock market volatility as the reason why investors are sellers, but I do not think that is the case.
Normally flow follows performance. Stocks go up and more money goes into stocks. But that is not the case here. The Federal Reserve has flooded the markets with zero-cost cash, which has been keeping a floor under stock prices. In other words, while stocks are staying up because the Fed is manipulating the stock market, the economy still sucks. And, the lousy economy is forcing people to sell stocks.
That’s why you can’t conclude that investors are merely avoiding stocks. The bottom line is I think investors have been selling because they need the money. It could just be that simple.
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)
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