Usually the worst market-timers, individual investors in the United States and elsewhere have been dumping stock mutual funds in a big way since January amid a major sell-off. But history suggests that investors might be dumping equity funds at exactly the wrong time as U.S., Canadian and European interest rates start to decline.
According to data from the Investment Company Institute in the United States, mutual fund investors redeemed $32.9 billion dollars’ worth of stock funds last month – the highest liquidation figure since July 2002 – just three months prior to the bottom of that bear market.
And in Canada, Italy and France, figures show the same trend. Mutual fund investors are dumping their stock funds and running into the relative safety of money-market funds.
But is the trend a bullish signal for contrarian investors after a bear market decline for many global markets since last October?
I don’t think so. Though I’m expecting global markets to rally in a big way over the next few weeks after a relentless sell-off since mid-October, the big picture for corporate earnings isn’t exactly bright this year. I think earnings estimates are way too optimistic and that implies equities are still too expensive. The entire spectrum of the credit market is still under attack, banks are continuously writing off their bad debts and increasingly, won’t make loans to even credit-worthy clients as they struggle to repair balance-sheets. None of this suggests a return to boom-times soon.
The good news is that as the year progresses, equities will eventually form a bottom as massive Federal Reserve credit expansion combined with help from other major central banks, will thwart this bear market. Mutual fund investors are not good market-timers; but this time, I think they might be right to raise cash and take money out of the market. The bear market is not over.
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