Are Investors Ready to Forgive and Forget?

Photograph by Rick Giles/Gallery Stock

Waiting for: GuffmanGodota girl like you.

Such anticipations pale in comparison with waiting for individual investors to return to a stock market that has broken their hearts one too many times over 13 years.

But what’s this? There are tentative signs that the era of “equity abandonment,” as the Street quasi-clinically puts it, might be coming to a close. According to data shop EPFR Global, in the first week of the year, equity mutual funds posted their second-highest inflows on record: $22 billion went into stock funds around the world, with emerging-market offerings—standout performers during America’s lost decade—taking in their most on record.

This all came as the Standard & Poor’s 500-stock index posted highs not seen in five years, amid a period of six straight years of U.S. investors pulling cash from domestic shares. Just last year, even as the market posted double-digit returns, about $150 billion was yanked from mutual funds focused on American equities, according to the Investment Company Institute. That was somehow worse than 2008’s rush to the exits.

Is the purging over?

“Hard to tell from one week,” says Citigroup U.S. equity czar Tobias Levkovich. “Need to see a few more data points, but stocks have been beating bonds for about four years, so it’s about time that individual investors recognized it.”

You know what they say about Mom and Pop’s penchant for buying high and selling low. Of course, it would be unfair to discount that a good part of this behavior comes out of end-meeting necessity. With joblessness so high and household finances still hung over from the subprime credit binge, more than one in four U.S. workers with 401(k) and other retirement accounts now tap them for expenses, future retirement complications be damned.

A broad re-espousal of equities must overcome other challenges. “The journey to the Great Rotation is unlikely to be smooth,” writes Merrill Lynch’s Michael Hartnett. “In our view, the probability of a major correction in risk markets in the first half is rising particularly because investor sentiment has simply leapt higher in recent weeks.” He says a rapid rise in interest rates or nations devaluing their currencies to stoke growth could incite a selloff.

So what to make of all that restive cash poured into shares to start the year? Yes, a few days of data does not a trend make. But if investors are maybe dipping their toes back in now, you have to wonder how much they will bolt (shouting “Told you so!”) if there is a correction, the likes of which the market has not experienced since 2011.

The most recent precedent is disheartening. The record for equity fund inflows globally was the penultimate week of September 2007, when investors committed $23 billion. In a show of tragic timing, the market then briefly visited an all-time high, just before posting its worst year in modern history.

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