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ECONOMIC INSIGHTS

Stocks: A Wary Good Sign for Bulls

ABOUT THE AUTHOR

June22,2015
MiltonEzrati
Partner,SeniorEconomistandMarketStrategist
1189Views

Evenamidamultiyearmarketadvance,retailequityinvestors
remaincautious.Hereswhythatcouldactuallyhelpextendtherally.

MiltonEzrati
Partner,SeniorEconomistand
MarketStrategist

Atbase,itisagoodsignfortheequityrally:retailinvestorscontinuetosellstocksonbalance.In
thepast,astockrallyofthehugeproportionsexhibitedduringthepastfewyearswouldhave
inducedafloodofretailinvestmentdollarsintoequitymutualfunds.Thathasnotevenbegunto
happen,atleastaccordingtotheInvestmentCompanyInstitute(ICI).Nodoubtthisreluctanceto
buystocksreflectsthenewfoundcautionhouseholdshaveshownineveryaspectofspendingand
savingamatterdiscussedfromdifferentperspectivesinthisspaceatvarioustimes.Whatever
thecause,however,itbodeswellforthedurabilityoftheequityrally,suggestingthatanypush
fromtheretailinvestorhasyettoemergeandthatthemarketisalongwayfromtheoverpricing
thatsuchapushcausesinitslaterstages.
Tobesure,theICIdoesreportthatamountsinequitymutualfundshaveincreased.Assetsin
domesticU.S.equityfundshaveincreased9.8%duringthepast12monthsthroughApril2015
(themostrecentperiodforwhichdataareavailable).1Assetsinworldequityfundshaveincreased
8.6%duringthistime.Butespeciallyinthecaseofdomesticequities,thegrowthinassetswas
morethanaccountedforbyrisingstockprices.Onbalance,investorshavewithdrawnmonies
andthatpatternhaspersisted.InthefourweekperiodfromlateApriltolateMay(themostrecent
periodforwhichdataareavailable),mutualfundinvestorswithdrew$19.4billionfromdomestic
U.S.equitymutualfundsonabaseofabout$6.5trillion.Incontrast,retailinvestorshave
sustainedtheirenormous$2.6trillioninmoneymarketholdings,despitetheminusculeratespaid
insuchinvestments,andincreasedtheirbondholdings,especiallyinthemunicipalarea,where
assetshaveincreased10.2%duringthe12monthstolastApril.Andthosepatterns,too,showno
signofshifting.TaxableandmunicipalbondmutualfundsduringthefourweekstolateMaysaw
$8.6billioninnetinflowsonabaseof$3.6trillion.
Thecautionaboutequitiesisunderstandable.Investorshavesufferedtwoterriblebearmarkets
duringthepast15years.Ineach,investorssawlossesof50%ormoreinequityassetvalues.
Thereticenceaboutequitiesalsofitsalargerpattern.HouseholdssincetheGreatRecessionof
200809haveshownanatypicalcautioninallaspectsofbudgetingandfinance.Theyhave
avoideddebt,keepingitsgrowthslowerthanthepaceatwhichtheirincomeshaveexpanded.
Theyhavekepttheirspendinggrowthintandemwithincomegrowth.Suchbehaviorstandsin
starkcontrasttothewayhouseholdsconductedthemselvesduringthe40plusyearspriortothe
GreatRecession,whentheyspentaggressively,increasedtheirdebtfasterthantheirincomes
grew,andfavoredhighreturn/highriskinvestments.Theirwarinessofequitiesnow,and
eagernesstoacceptlowyieldsinseeminglysaferfixedincomeinvestments,wouldseemto
dovetailwiththerestoftheirnewprudenceandcaution.
ThequestionforthefutureiswhetherAmericanhouseholdshavereallychangedtheirspots.If
theyhavenotchangedfundamentallyanddorevertbacktoolder,moreaggressivepatterns,then
theyshouldatsomefuturedatechasetheequityrally.Theflowoffundsintostockswill,asinthe
past,extendtherally,thoughintimeitwillcreatetheoverpricingthatwouldleadtothenextbear
market.Iftheyhaveindeedchanged,thenfuturemoneyflowsshouldremainsubduedandthe
rallylikelywouldunfoldinamoremutedwaythaninthemoredistantpast,delayingthattime
whenoverpricingbecomesworrisome.Eitherway,thepresentcircumstancesuggeststhattodays
equityinvestorhastimebeforeheorsheneedstoworryaboutexcessivepricingandcouldrather
lookforwardtoanextensionoftherallyinoneformoranother.
1 AlldatahereinfromInvestmentCompanyInstitute.

ANoteaboutRisk:
Thevalueofinvestmentsinequitysecuritieswillfluctuateinresponsetogeneraleconomicconditionsandtochanges
intheprospectsofparticularcompaniesand/orsectorsintheeconomy.

Theopinionsintheprecedingeconomiccommentaryareasofthedateofpublication,aresubjecttochangebasedonsubsequentdevelopments,andmaynotreflecttheviewsof
thefirmasawhole.Thismaterialisnotintendedtoberelieduponasaforecast,research,orinvestmentadviceregardingaparticularinvestmentorthemarketsingeneral.Norisit
intendedtopredictordepictperformanceofanyinvestment.ThisdocumentispreparedbasedoninformationLordAbbettdeemsreliablehowever,LordAbbettdoesnotwarrant
theaccuracyandcompletenessoftheinformation.Consultafinancialadvisoronthestrategybestforyou.

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