There's another sign that investors' confidence is returning: Last month they added money to U.S. stock mutual funds at the fastest clip in seven years. The year-opening surge also marked the first time in nine months that investors added more than they withdrew.
All told, investors deposited a net $21.4 billion to U.S. stock funds in January, the biggest monthly increase since a net inflow of $23 billion in February 2004, industry consultant Strategic Insight said Friday.
Last month's result also snapped a string of net withdrawals that began last May. The last time there was a positive inflow of cash into domestic stock funds was April, when a net $11 billion came in.
Investors soon reversed course after the stock market's May 6 "flash crash" single-day plunge. Fears about Europe's government debt crisis also peaked that month.
But the stock market has now risen five consecutive months, and the Standard & Poor's 500 index is up about 26 percent since Sept. 1. Fourth-quarter earnings reports have largely been positive, and most economic indicators suggest the recovery is gaining momentum.
"The interest in stocks is being shored up by a new year, and stock prices which have doubled since their bottom in early 2009," said Avi Nachmany, research director with New York-based Strategic Insight.
He also cited improving prospects for stocks of large U.S. companies, which had lagged stocks of smaller companies until recently.
Another factor: Worries about future market volatility have eased after the past few weeks' run of modest, steady gains for stocks.
And although political unrest in Egypt has shaken many investors in the world's emerging markets, U.S. investors last month continued to add more than they removed from funds buying foreign stocks. This extended an eight-month positive streak, Strategic Insight said. Investors added a net $12.5 billion to those funds, a category that also includes stocks of companies in developed markets like Europe and Japan.
With respect to bonds, investors took a mixed view. The money added to taxable bond funds last month was offset by a movement out of municipal bond funds. Investors added a net $12.8 billion to taxable bond funds, including corporate bonds, while $12.7 billion flowed out of muni bond funds, which buy the debt of state and local governments.
Investors have been pulling out of muni bonds since early November, largely due to fears about the declining fiscal health of many states and cities, and their ability to satisfy debt obligations. The federal government's recent extension of Bush era tax cuts also has made the tax advantages that munis offer less enticing, since low rates on other forms of investment income have been extended.
Before the stock market meltdown in late 2008, it was common for stock funds to take in twice as much money as bond funds in any given month. Since that time investors have mostly been pulling their money out of U.S. stock funds, and shifting into bonds, or foreign stock funds.
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