Suckers or saviors? Small investors buy up stocks

Fund flows offer no guide to future stock moves, says one analysis

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 Feb. 5, 2013, 11:37 a.m. EST 

 http://www.marketwatch.com/story/suckers-or-saviors-small-investors-buy-up-stocks-2013-02-05?pagenumber=2

 

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By William L. Watts, MarketWatch

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So is there any reason for bulls to cheer?

The positive flows are “one piece of a bullish puzzle that I’m seeing,” said Adam Sarhan, chief executive of Sarhan Capital in New York.

It fits in with other factors “that suggest this market wants to continue trading higher,” Sarhan said.

Those other factors include valuations that remain attractive, earnings growth, solid prospects for continued economic growth, and indications that global central banks are poised to continue taking steps aimed at ensuring the global recovery remains intact.

Avi Nachmany, director of research at Strategic Insight, said he suspects the turn reflects an important and potentially positive turn in investor attitude.

Individual investors are fretting less about politics and issues such as the fiscal cliff, instead taking a more upbeat view on the economic outlook thanks to rising home prices, falling unemployment and fading memories of the 2008 financial crisis, he contends.

In that vein, it appears investors are also seeing less of a disconnect between rising stocks on Wall Street and their own situations, he said.

“If you make the assumption that slow and persistent economic improvement continues in the U.S., then what we saw in January is the future,” Nachmany said.

The recent decline in market volatility may also be a big part of what has lured individual investors back into stocks, said ConvergEx’s Colas.

The rally from the 2009 lows has been marked by some ugly corrections, which have spooked investors, likely leaving them wary of jumping back into the market due to fears they could be immediately clobbered.

Wall Street’s fear gauge, the CBOE Volatility Index, or VIX VIX +0.67%  , last week sank to its lowest level since mid-2007.

So with fear receding, greed — that other storied driver of market action — moves to the fore.

Meanwhile, investors stuck with money parked in low-yielding money-market funds and bonds may be understandably itching to seek out higher returns, said Barber at UC Davis.

Observers, however, are treating the January jump in flows with extra caution due to concerns 2013 tax changes and new rules limiting deposit insurance on bank and money-market accounts triggered a rise in flows to equity and fixed-income funds alike.

Rather than a “Great Rotation” out of fixed-income into equities, January may have marked a “rotation out of money-market funds and bank accounts that no longer have full FDIC (Federal Deposit Insurance Corp.] insurance,” Mohammed el-Erian, chief executive of Pimco, the world's largest bond fund operator, told Bloomberg Television last week. Watch video of Pimco's el-Erian.

Pimco colleague Bill Gross expressed similar skepticism in comments over Twitter. Read Gross on the 'Great Rotation.'

Colas held out the possibility the January data was skewed by investors jumping back into the market after making heavy redemptions late last year in anticipation of tax changes in 2013. ICI data showed investors pulled an “inordinately large” $26.1 billion out of domestic U.S. equity funds in December.

“I would want to see several months [of rising inflows] to be convinced investors are falling back in love with stocks,” Colas said.

William L. Watts is MarketWatch's European bureau chief, based in Frankfurt. Follow him on Twitter @wlwatts.