Individual Investors: Late to the Party?

Stocks are up more than 20% since early March, but many remain skeptical.

Among those not jumping on the equity bandwagon are individual investors, at least according to one measure.

TrimTabs Investment Research measures the flow of dollars into and out of mutual funds, which are far more popular with individuals than with traders or institutional investors.

In all of March, investors yanked $30.8 billion out of equity mutual funds, TrimTabs estimates. About two-thirds came from U.S. funds and the rest from international stock funds. Bond funds saw an inflow of $16.4 billion.

In the first three days of April, that trend may have changed slightly, though it’s too early to say for certain. According to data released today, April 1st and 3rd saw small outflows, while April 2nd saw an inflow of $6.7 billion.

The lack of enthusiasm from the average investor is hardly surprising. Earlier this year, a 20% rally from November’s lows evaporated into thin air. This one could, too.

The economy is another reason individual investors might be holding onto cash and other investments safer than equities. If you’re worried about the future of your job or business, you will invest cautiously.

Some economists also seem wary of the recent market rally. John Ryding and Conrad DeQuadros of RDQ Economics say “it is too early for us to be bullish on the stock market, especially given the likely muted nature of the recovery when it arrives.”

They asked, in a note on Friday:

The severity of the recession over the last two quarters has been staggering—both in the U.S. and globally — and yet this fact is known to equity market participants. Is it a case of March Madness or do investors see something that is not yet evident in the economic data?

Those who sat out the recent stock market rally face a quandary: Have they missed out on a fabulous party? If so, this would be another case – frequent in stock market history — when small-time investors both exited and entered the market too late.

On the other hand, maybe in this case the investing public has a better sense of real economic conditions than overly enthusiastic traders on Wall Street. Maybe this is a party investors will be glad they missed.