Investors are abandoning stocks in droves, having withdrawn $75 billion from U.S. equity funds since the end of April. That figure tops the $73 billion pulled from stock funds in the five months following the collapse of Lehman Brothers in 2008. This begs the questions: Where are they going and when will they return?
Bond funds have taken in $42 billion since the end of April. Declining Treasury yields suggest that investors have sought the perceived safety of government securities while fleeing the volatility and uncertainty of the stock market. Other havens include money market funds, bank deposits and CDs. Also, a variety of insurance products that offer a level of guaranteed return have benefited from stock market flight.
When will investors buy stocks again? If the answer is, once the European crisis is solved and there are signs the U.S economy is on a better growth path, it will be too late. Stock prices already will have risen by the time those issues are resolved. As Warren Buffett counseled in October 2008, “If you wait for the robins, spring will be over.”
As usual, though, many investors will pay a hefty premium for “feeling better” about things. Some won’t find the confidence to buy stocks until they read the headline “Stock market sets new all-time high, surpassing October 2007 mark of 14,280 on the Dow.” Once this occurs, I expect mutual-fund inflows to reach record levels in the ensuing months.
This is not an endorsement to go “all in” today. Instead, recent market volatility offers opportunities to chisel away at reasonable valuations for blue chip companies. A few smart market veterans have recently weighed in with their long-term outlooks.
The Wall Street Journal interviewed Richard Sylla of New York University’s Stern School of Business. Sylla has studied market behavior as far back as 1790, and correctly predicted a poor decade for stocks in 2000. Today, his analysis suggests that if the market follows its long-term pattern, the Dow could reach 20,250 by the end of 2020. That 78-percent gain equates to a 6.5-percent annual rate of return. Sylla counsels that “people ought to take a longer view and think in terms of years and even decades.”
John Bogle, the 82-year-old founder of Vanguard Group, in 1999 predicted a low-single-digit return for stocks over the next decade. It turned out he was too optimistic. Bogle now believes stock investors will double their money in 10 years for a 7-percent annual rate of return.
In a MarketWatch interview, Jeremy Grantham of investment firm GMO LLC concedes there is a “decent chance” of stocks becoming even cheaper. Yet in keeping with a long-term view, he submits that “in stocks you will eventually do OK at these prices.”
Going back to the 2007 highs, the emotions surrounding the market were one of carefree optimism—there was no concern about risk. Of course, we now know investors should have been turning cautious and selling stocks as they were effortlessly soaring higher.
Today, the pendulum has swung 180 degrees in the other direction. Investors’ sentiment is in the dumps and risk aversion is pervasive. So by extension, one could conclude it’s a good time to buy stocks.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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