U.S. Stock Outflows: a 12-Year Grudge

Photograph by Moodboard/Corbis

For those still reeling from Fleecebook 2012, take heart: Feelings of abandonment are all the rage right now. Money was already fleeing U.S. equity funds, even as the stock market recently visited multiyear highs.

According to the Investment Company Institute, domestic stock funds have seen 13 consecutive weeks of outflows. In the week ended May 16 alone, investors yanked an estimated $3.45 billion from the category—$1.10 billion more than they withdrew the prior week. Year to date, the funds have experienced $38 billion in outflows. This song has remained the same for the better part of a lost decade; last year’s $85 billion flight marked the sixth straight year of outflows from U.S. stock funds, including a $121 billion evacuation in 2008.

The market peaked in 2000, after all, and now is back only to where it was 13 years ago—to say nothing about how inflation has eaten into that stagnation. In 2009, stocks briefly dipped to 1996 levels. Dot-com crash, market-timing scandals, Enron, WorldCom, Panic of 2008, EuroFlu. If you can’t shed a tear for the individual investor, then, well, you’re a brute.

As Twitter lounge lizard Josh “The Reformed Broker” Brown so eloquently put it: “Once the bullies shove you into a locker and hold your head down in the toilet, you learn to take a different hallway to homeroom.”

True. What isn’t as easy to comprehend is the overwhelming drive to keep pulling money out even during bull runs. According to research by the Leuthold Group, while the S&P 500 has gained 107 percent in the 38 months since its spring 2009 low, just nine of those months saw net inflows into U.S. stock funds. Similarly, in the 121 percent market surge of 1974 to 1980—i.e., the heyday of the show Good Times—there were only 15 months of net inflows into the category. (Not getting hassled, alas, meant not getting hustled.)

By comparison, bond funds are now in an era of hot and constant inflows that resemble the rush into tech in the late 1990s. For example, the aforementioned billions of outflows from stocks in mid-May coincided with an inflow of $7.22 billion into taxable and municipal funds. A great piece in the Financial Times points to how this divergence can be setting the stage for another era of buy-high, sell-low regret. After all, from 1900 to 2010, stocks outpaced inflation by 6.3 percent a year in the U.S., according to calculations by the London Business School, compared with only 1.8 percent for bonds.

With Treasury yields daily flirting with record lows, the market keeps doubling down on a monster bet that inflation just won’t be an issue any time soon. If that turns out to be wrong—and it could be very wrong—investors will have to scramble to undo a decade’s worth of self-inflicted damage.

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