The Standard & Poor’s 500 stock index is up close to 60% from the March 2009 bottom. Most investors, according to data on mutual fund money flows, have stayed the course so while they were pummeled by dropping prices in 2008, they’ve also profited from the rally of 2009.
 While investors pulled a net $174billion from stock funds in 2008, according to Morningstar, that’s a drop in the bucket compared to the $4.51 trillion in stock mutual funds at the end of August, according to the Investment Company Institute.
Still not much of that $174 billion that left stock funds in 2008 has come back in 2009. In the first eight months of the year, investors put a net $209 billion into bond mutual funds, but just $15 billion into stock funds.
Nothing terribly surprising in that. One of the reasons that bear markets are so devastating to some portfolios is that the same people who piled in at the top, sell at the bottoms, and then don’t get back in until stocks have strongly rallied off the bottom.
And this market hasn’t made it easy to get back into stocks. The rally has moved so quickly that it left lots of money on the sidelines and the economic data has been so ambiguous that it’s hard to feel very confident that the recession is over and it’s safe to jump in now after a 60% gain.
I’ve been wrestling with this in the Jubak’s Picks portfolio for months. I’ve still got 30% in cash in that portfolio because I’ve never been totally convinced by this rally. But that means I’ve been 70% invested so that I have profited from the move. For me that combination of cash and stocks was a decent compromise method for handling fear and uncertainty.
The question, of course, is Wat to do now? If I can judge from my own internal arguments, a lot of the money that left the market in 2008 and that is still out of stocks is just waiting for the next dip to buy in. That suggests that the next dip won’t be severe or long-lasting. To catch it you’ll have to move fast.
If the dip is going to be shallow and short, it hardly seems worth waiting for it. Timing it will be very difficult and catching it just right still might mean nothing more than buying at a 7% discount.
Besides it”s not the short-term problems in this economy and this stock market that worry me. I think we are likely to see a gradual improvement in the economy in 2010 that’s strong enough to support at least a modest increase in stock prices from current levels.
It’s 2011 that gives me the heeby-jeebies. I’m not convinced that the recovery that we will see in 2010 will be strong enough to survive the withdrawal of fiscal and monetary stimulus in 2011.
That’s left me with my current strategy for Jubak’s Picks of putting some money back to work in stocks–my cash position is down to roughly 30% now from 40% this summer–if I can find shares and sectors trading at reasonable prices with good prospects for growth in 2010.
I think the bulk of the easy gains in this rally have been collected but there are still modest profits over the next 12 months for the disciplined.
But I don’t want to get too enthusiastic, overpay, and take my eye off the dangers that loom in 2011.
I am still trying to make sense out of $170 bln “on a side”. I assume that only 5% of the total US population are involved (i.e. about 15 mln), which means that it is about $10,000 per person, which what I personally consider normal to keep on my saving account just as an emergency fund. Considering that life is tough for everyone these days, it is normal to assume that people keep more in their emergency funds now than they did 2 years ago. I do not see those money coming back to the stock market until we establish a steady growth and see unemployment figures back to 7%. As I always say, I am not an economist, I am just trying to make a common sense out of it.
My take on this, especially seeing the market at this point in time, is that this “correction” will be a little bigger than what JJ is suggesting.
As I talk to the ordinary folk, I get the feeling that falling prices will scare them. This will have them not buying, and the market is left to fall without this “padding”.
A lot of these people were burned twice, remember.
Mark: You are kidding, right? Do not take me wrong, but with the current (2008) rates of GDP growth, it will take Indonesia about 200 years to reach the GDP of Russia. By the way, Brazil has lower GDP and growth rate figures than Russia.
P.S. If I remember it correctly the same argument about population growth was applied to Japan, but it is still number #2 on the GDP list, and the last time I was there I did not notice that there are not enough people on the streets.
I am short brazil, way overbought, money is coming out of the market with the 16% u/e, underemployed raiding their IRAs and 401ks to pay debt,eat and mortgages. so that could offset any “I missed the rally” boobs who rush in now after missing March buy. LLY is one safer bet on my list but at 27 not 32.
viwi – If Indonesia’s GDP doubles over the next two or three years and Russia’s goes down 10%, does it matter that Russia’s economy is 3x as large from an investor point of view? I think what Jim is saying is that Russia’s population is going to decline due to the age of the average person vs Indonesia.
Was it a joke about BIIC? Not only Russia’s economy is 3 times larger, but also Turkey and Mexico have GDP twice of the size of Indonesia. I’ve been there once, and should say that Indonesia has a very long way to go before it can be seriously considered.
I’m not suggesting that both parties shouldn’t be viewed unfavorably, I’m saying that something closer to gridlock would be welcomed with increased investor sentiment.
Can the US meet its debt obligations? That’s a question I think many of us in the US asked during the Bush administration and now. The world that holds are debt has to be asking that question. Another way of putting it: is the US spending unsustainable? I think US consumer spending was unsustainable especially given the times, and I don’t see how the government can sustain their spending.
mturpin, in the long term I think U.S.l investors need to be expanding their holdings in faster growing emerging econoies. I’d go with BIIC rather than BRIC since I don’t think that Russia really belongs in the group due to its population collapse. (The second I is Indonesia. Knocking on the door to join the club with China, India, and Brazil. Where Brazil was before Lula.)
spede, I don’t have any way to post the cash position regularly at the moment. Working on it. Feel free to let me know of anything else you’d find useful.
barrett, I didn’t exactly leave in May. MSN Money took my soap box away. Let me assure you that it’s as frustrating not to be able to publish for 2 months as it must have been not being able to read my gem-like prose.
This is going to be a very, very interesting earnings season. Earnings are likely to be decent to good because of what you’ve identified as short-term boosts. But Wall Street has a tendency to extrapolate one-time events into long-term trends. Which wouild leave the markets set up for disappointment if the consumer stays home in the Christmas shopping season. And I don’t see anybody who is projecting anything more positive than flat for holiday sales.
I wouldn’t assume that a 2010 Republican pickup/victory would be regarded positively by the world. The global financial markets are deeply worried about the ability of the U.S. to meet its debts. And they remember that the Bush administration wasn’t exactly a model of fiscal restraint. I think our international creditors are very likely to say A plague on both your houses.
My internal quandry is the shadow inventory of real estate that hasn’t hit the market, the consumers ability to spend and government policies. That vs historic low interest rates that make equities more attractive vs the alternatives and the sideline money.
For every green shoot there is a landmine that could be buried next to it.
My gut tells me that the consumer is not about to deliver a recovery and that unemployment will prevent that from even being a consideration. This leaves business to deliver a recovery of sorts. That’s where I am most nervous given the government policies that are murky to say the least.
I’m approaching investing right now with an eye toward the 2010 mid-term elections. Should it become more likely that the GOP can regain significant ground and be a real obstacle to anti-growth policies then I think the markets can keep a floor under them and have a reasonable upside for the next year. However, should this scenario fail to materialize, I’ll be with the crowd trying to get out of the door.
I’m not trying to inject politics into the discussion for the sake of polluting the atmosphere, I’m simply recognizing what I think can be a strong catalyst for movement. By way of example, Germany’s recent elections seemed to be welcome news to the investment community in Europe. Something similar on this side of the pond would have a bigger ripple effect on the global economies.
I don’t know that I am as optomistic. 2010 may be better but much of what you see in Q3 earnings is temporary – clunkers for cash/first time home buying credit etc. Good Barron’s article “Clunker Cash: No Boost for Consumers”. This market is way ahead of itself. Don’t know how severe a dip may be, not much, but limited upside I think for a year +.
Jim, You are doing are doing an awesome job. Your thoughts are very insightful. From time to time you mention that your portfolio is partially in cash (30% in this post). Where can you find the current cash position in the portfolio at any given time
Does your concerns include the BRIC and other developing economies or just the US? Should we individual investors be looking outside the US for the best opportunities? Thanks.
jim glad to see your back at it. i was disappointed when you left during the storm.
thanks for the reassurance Jim