Stocks: A Wary Good Sign for BullsJune22,2015MiltonEzratiPartner,SeniorEconomistandMarketStrategist

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Evenamidamultiyearmarketadvance,retailequityinvestorsremaincautious.Hereswhythatcouldactuallyhelpextendtherally.

Atbase,itisagoodsignfortheequityrally:retailinvestorscontinuetosellstocksonbalance.Inthepast,astockrallyofthehugeproportionsexhibitedduringthepastfewyearswouldhaveinducedafloodofretailinvestmentdollarsintoequitymutualfunds.Thathasnotevenbeguntohappen,atleastaccordingtotheInvestmentCompanyInstitute(ICI).Nodoubtthisreluctancetobuystocksreflectsthenewfoundcautionhouseholdshaveshownineveryaspectofspendingandsavingamatterdiscussedfromdifferentperspectivesinthisspaceatvarioustimes.Whateverthecause,however,itbodeswellforthedurabilityoftheequityrally,suggestingthatanypushfromtheretailinvestorhasyettoemergeandthatthemarketisalongwayfromtheoverpricingthatsuchapushcausesinitslaterstages.

Tobesure,theICIdoesreportthatamountsinequitymutualfundshaveincreased.AssetsindomesticU.S.equityfundshaveincreased9.8%duringthepast12monthsthroughApril2015(themostrecentperiodforwhichdataareavailable). Assetsinworldequityfundshaveincreased8.6%duringthistime.Butespeciallyinthecaseofdomesticequities,thegrowthinassetswasmorethanaccountedforbyrisingstockprices.Onbalance,investorshavewithdrawnmoniesandthatpatternhaspersisted.InthefourweekperiodfromlateApriltolateMay(themostrecentperiodforwhichdataareavailable),mutualfundinvestorswithdrew$19.4billionfromdomesticU.S.equitymutualfundsonabaseofabout$6.5trillion.Incontrast,retailinvestorshavesustainedtheirenormous$2.6trillioninmoneymarketholdings,despitetheminusculeratespaidinsuchinvestments,andincreasedtheirbondholdings,especiallyinthemunicipalarea,whereassetshaveincreased10.2%duringthe12monthstolastApril.Andthosepatterns,too,shownosignofshifting.TaxableandmunicipalbondmutualfundsduringthefourweekstolateMaysaw$8.6billioninnetinflowsonabaseof$3.6trillion.

Thecautionaboutequitiesisunderstandable.Investorshavesufferedtwoterriblebearmarketsduringthepast15years.Ineach,investorssawlossesof50%ormoreinequityassetvalues.Thereticenceaboutequitiesalsofitsalargerpattern.HouseholdssincetheGreatRecessionof200809haveshownanatypicalcautioninallaspectsofbudgetingandfinance.Theyhaveavoideddebt,keepingitsgrowthslowerthanthepaceatwhichtheirincomeshaveexpanded.Theyhavekepttheirspendinggrowthintandemwithincomegrowth.Suchbehaviorstandsinstarkcontrasttothewayhouseholdsconductedthemselvesduringthe40plusyearspriortotheGreatRecession,whentheyspentaggressively,increasedtheirdebtfasterthantheirincomesgrew,andfavoredhighreturn/highriskinvestments.Theirwarinessofequitiesnow,andeagernesstoacceptlowyieldsinseeminglysaferfixedincomeinvestments,wouldseemtodovetailwiththerestoftheirnewprudenceandcaution.

ThequestionforthefutureiswhetherAmericanhouseholdshavereallychangedtheirspots.Iftheyhavenotchangedfundamentallyanddorevertbacktoolder,moreaggressivepatterns,thentheyshouldatsomefuturedatechasetheequityrally.Theflowoffundsintostockswill,asinthepast,extendtherally,thoughintimeitwillcreatetheoverpricingthatwouldleadtothenextbearmarket.Iftheyhaveindeedchanged,thenfuturemoneyflowsshouldremainsubduedandtherallylikelywouldunfoldinamoremutedwaythaninthemoredistantpast,delayingthattimewhenoverpricingbecomesworrisome.Eitherway,thepresentcircumstancesuggeststhattodaysequityinvestorhastimebeforeheorsheneedstoworryaboutexcessivepricingandcouldratherlookforwardtoanextensionoftherallyinoneformoranother.

AlldatahereinfromInvestmentCompanyInstitute.

ANoteaboutRisk:

Thevalueofinvestmentsinequitysecuritieswillfluctuateinresponsetogeneraleconomicconditionsandtochanges

intheprospectsofparticularcompaniesand/orsectorsintheeconomy.

MiltonEzratiPartner,SeniorEconomistandMarketStrategist

ABOUT THE AUTHOR

Theopinionsintheprecedingeconomiccommentaryareasofthedateofpublication,aresubjecttochangebasedonsubsequentdevelopments,andmaynotreflecttheviewsof

thefirmasawhole.Thismaterialisnotintendedtoberelieduponasaforecast,research,orinvestmentadviceregardingaparticularinvestmentorthemarketsingeneral.Norisit

intendedtopredictordepictperformanceofanyinvestment.ThisdocumentispreparedbasedoninformationLordAbbettdeemsreliablehowever,LordAbbettdoesnotwarrant

theaccuracyandcompletenessoftheinformation.Consultafinancialadvisoronthestrategybestforyou.

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