An article in Monday’s edition of the Wall Street Journal (Sept. 26) caught my eye. It was called “Pivot Point: Investors Lose Faith in Stocks.”
The article went on to discuss just what the title said, that investors were pulling money out of stocks.
It said, "In a historic retreat, investors world-wide during the three months through August pulled some $92 billion out of stock funds in the developed markets, according to data provider EPFR Global — an exodus that more than reversed the total amount of money investors had put into those funds since stocks bottomed in 2009. The withdrawals matched the worst three-month period during the depths of the financial crisis.”
That exodus continued in September with another $25 billion withdrawn from developed-market stock funds.
These are big numbers, but perhaps more importantly, the article was pointing out that investor sentiment was changing more fundamentally.
Rather than seeing the recent downturn as just another downturn which will automatically be followed by an upturn, many investors were beginning to think that stocks were in for a longer term period of malaise.
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Fundamentally, they were souring on stocks as a long term growth engine for their portfolios. Although this has some relevance to the market today, I think it has much more relevance going forward because this is the kind of change in mentality that can make the next downturn much larger.
As I have said before, if this market falls below 10,000, I think the Fed will feel increasingly forced to intervene with more money printing.
We’re not at 10,000 yet, so the Fed is not doing anything. But, I think the day of 10,000 is coming, partly because of the change in mentality the Wall Street Journal is talking about, and somewhere below there — I don’t know exactly where — the Fed will intervene. That will help boost the markets and certainly stop the decline from becoming a meltdown.
The bigger problem comes next spring and summer. It’s not likely the U.S. economy or the world economy will be much better then. It is far more likely that both will be in worse shape.
The Fed’s money printing efforts will have helped the stock market in spite of bad economic news, but as seen with the boost to the markets from QE2 it will likely be short lived. That’s when the fundamental lack of belief in stocks starts to hit. That’s because the good effects from money printing on the stock market require both printed money AND a very positive fundamental view toward the market. If that view of the market is deteriorating, money printing will have less effect.
We have already seen this type of fundamental change in people’s view toward an investment with the housing market. When housing first began going down, it was always viewed as a buying opportunity. But, as the years passed, that mentality began to fade and housing was increasingly seen as having less and less fundamental long term ability to increase in price and, in fact, could even fall in price for another year or two.
I might add that there was also a recent article in the Wall Street Journal discussing how buying on the dips isn’t always the best way to boost your stock portfolio.
A key point of the article was how do you know if the dip is really the bottom? So, like housing, the mentality of buying on the dips, which is based on a long term fundamental faith that stocks will go up no matter what, is fading.
What’s happening here is a fundamental element of bubble psychology: time is the enemy of all bubbles.
As we get further away from the meltdown of the stock market in 2008 and 2009, investors begin to see more and more that the fundamentals aren’t really there — just like housing. You can give great arguments in the meantime why stock and housing are in bubbles, but it won’t really work that well with most investors. Time itself is the most powerful argument against bubbles. It simply takes time to see it because people don’t want to see it.
Everyone wants their bubble back. What we are witnessing in that Wall Street Journal article is that more people believe it won’t come back and that is beginning of the real popping of the stock market bubble.
The Wall Street Journal article also highlighted the research work of economists Ken Rogoff and Carmen Reinhart on financial crises. It’s worth reviewing that work — where it’s right and where it’s wrong — but that will have to wait for part two of this blog.
About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $120 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here
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