For years now, investing professionals have been waiting for the individual investor to get back into good old-fashioned domestic equity mutual funds. The stock market crash of 2008-2009 spooked a lot of people, leading them to withdraw more than $400 billion from such funds in the past four years. No amount of rising on the part of the S&P had been enough to bring them back.
But now things seem to be turning around. Stock funds took in more than $50 billion in new assets in January and February of 2013, after taking in less than $1 billion in the same period a year earlier. In the first three months of this year, flows into stock funds were positive for 11 consecutive weeks, the longest such streak in more than three years. Domestic stock funds, which had gotten beaten up the worst in the years since the market collapse, saw positive inflows of nearly $20 billion in the first two months of 2013.
This situation is so unlike the fund landscape for the past few years that pundits have taken to calling it the Great Rotation. The conceit is that we are witnessing a grand shift from safe=haven investments into stock funds, or at least a change in mind-set that has led investors to believe that equity funds are safe once again.
While there have been many theories as to why the early part of the year saw so much new money in stock funds, none of them are close to definitive. One of the first theories as to why this was happening is because of the fiscal cliff, and its threat that tax rates on dividends would spike in 2013. As a result, many companies released “emergency” dividends before the end of the year which were presumably being reinvested in stock funds. But the inflows have now continued well past January.
January is always a big month for investing, anyway, what with year-end bonuses and everything. Investors put $28.6 billion into stock funds in January 2006, and $23.9 billion into them in January 2011. In neither case did the trend continue for the rest of the year.
But things may be different now. Investors are finally coming to terms with the fact that Treasury bills are at historic lows and don’t show a lot of signs of rising above 2 percent any time soon. People are rebalancing their portfolios with an eye toward recognizing that they can no longer afford to have their money sitting on the sidelines.
Indeed, most of the inflows appear to be coming from money market funds. Through the first two and a half months of this year, an estimated $60.9 billion has flowed into stock mutual funds, and an estimated $60.4 billion has flowed into bond mutual funds. Meanwhile, assets in money funds, meanwhile, have plunged by more than $80 billion.
That makes sense. Investors in recent years have actually lost purchasing power in money market funds, which have not been able to keep pace with inflation. Even those investors most spooked by the stock market crash are apparently looking for a chance to do a bit more with their money now.
If that money does continue to flow into stock funds – if indeed we have embarked on a Great Rotation – is that good news for the market as a whole? All that money may very well help prop up the stock market rally for the next few years. After all, if there is more money chasing after stocks, that will help drive the prices of stocks up. While all that money was flowing into stock funds in the first quarter of this year, the S&P 500 was up more than 7 percent.
People who were scared off by the 2008-2009 plunge must be kicking themselves for missing out on the doubling we’ve seen in the market since then. Those investors will, slowly but surely, come back to equities over time. Whether that’s in this Great Rotation or in some sort of slow-motion Great Evolution remains to be seen – but that money will be back.