NEW YORK, NEW YORK – JUNE 14: Traders work on the floor of the New York Stock Exchange (NYSE) on … [+]
Mutual fund investors are fleeing stocks to the tune of almost $180 billion in the year through April, new research shows.
The news, which comes from the industry group the ICI ( The Investment Company Institute) shows the total amount of money pulled out of foreign and domestic stock mutual funds for the period January through April was $179.4 billion up 57% from $114.1 billion for the same period of 2023, the research shows.
Stocks Go Out of Fashion in Early 2024
That fits with disappointment for some investors who had expected the Federal Reserve to have substantially reduced short term interest rates by now. Those rates remain at 5.5% as they have been since July last year. Many investors had invested in interest rate sensitive assets ahead of the forecast cuts, that so far have not arrived.
As most savvy investors know, that lack of a forecast rally reflects the fact that investing in the stock market is risky, meaning the results are not certain.
At then same time, mutual fund investors snapped up $107.9 billion of bond funds in the year through April. That’s up more than six-fold from 16.8 billion in the same four months of last year.
Bonds Beckon Mutual Find Investors
Bonds are generally consider a far lower risk for investors as usually the bonds pay the interest coupons on the loans and return the original capital to the lenders, a.k.a. the investors. While bonds are a safer investment in terms of certainty of receiving the principal and interest, the returns tend to be far lower than investing in stocks. At least that’s true over a long term period of years and years.
The difference in returns can be large. The average annual returns for stocks including reinvested dividends has been around 10%, according to NerdWallet. That compares to yearly returns on bonds of between 4% and 6%, according to the FinancialSamurai website. And that’s where this recent outflow-inflow phenomenon becomes interesting.
If bond returns woefully lag stock returns over decades then why did mutual fund investors, who are typically individual investors, flee stocks?
Part of it may be they are switching to exchange-traded funds which are often cheaper in terms of annual expenses. And also ETFs allow investors to buy and sell their assets at any point during the trading day.
However, there is a bigger issue. Individual investors often get panicked into selling risky assets when the market isn’t performing as well as they had expected. In this case, the market didn’t rally as expected because the Fed didn’t cut interest rates as was forecast by dozens of Wall Street wizards. In this case, that makes some sense.
Other issues that could have prompted mass stock sales f rom mutual fund is the uncertainty about the outcome of the forthcoming election and the wide disparity between the politics of the two main parties.
However, whatever the reason for individual investors dumping stocks, there tends to be an inverse relationship. When individuals dump stocks by the boat load that tends to be a bottom in the market and is often followed by a rally.
If that relationship, weird as it is, stays true, then we can view this stock-dumping episode as a positive for the S&P 500 index and the stocks held in the SPDR S&P 500 ETF that tracks the index.
