Market Talk

Searching for the retail stock-fund investor...

Based on mutual-fund flows, retail investors haven’t been giddy participants in the stock markets’ big move off March lows, preferring to divert most of their fresh investments into bond funds.

Unusual, since the average investor is typically a horrible market timer, enthusiastically pouring the most money into equity funds as market rallies peak, and yanking out their investments at moments of maximum pain during market bottoms.

So what gives now? Why hasn’t the S&P 500′s 60% move seduced more retail investors into stock funds?

“Maybe it’s because after a record nine point P/E multiple expansion this quickly from the recession low (normally we see a three point multiple expansion) the typical retail investor realizes that it makes no sense at this juncture to pay a Cadillac price for a Ford Focus,” Gluskin Sheff economist David Rosenberg writes in his daily commentary.

“The question is whether the public will do what they have in the past or whether there has been a secular shift away from speculation after 10 years of horribly negative returns in the stock market compared to bonds, combined with the disaster befalling real estate speculation in the last few years,” he adds.

Maybe the public, “and especially the Baby Boomer cohort, have resolved to save the old fashioned way and accept the meager guaranteed return offered by the bond market,” Rosenberg says. 

That may turn out to be a poor decision from a return-maximizing standpoint, he notes, but it’ll  ”ensure capital preservation and wealth appreciation, over time.”