This Is The Rally That Few Believed and Many Missed

Floyd Norris Notes on High & Low Finance November 5, 2010

The stock market hit bottom in March 2009, and when it started to move up, some mutual fund investors jumped in. There were net inflows into domestic stock funds in each month from April through July.

And then pessimism set in. Since then, it has been a rare period when money came in.

The Investment Company Institute, a trade group for funds, today estimated that $2.9 billion was taken out of such funds in the week ended Oct. 27. Assuming there was not a huge inflow later in the week — and there is no reason to think there was — October was the seventh month this year with net outflows.

The I.C.I. numbers indicate that from the end of March 2009 through last Wednesday, investors pulled a net $89.4 billion out of such funds. During that period, the S.&P. 500-stock index is up 45 percent. Much of the gain came early, of course, but the index was up 20 percent since the money stopped coming in at the end of July.

Some of that money may have come out because investors needed the cash, of course. But that is not the explanation. Money poured into bond funds over the same period, and continues to do so despite tiny yields.

The explanation is probably fear. Having been crushed in the financial crisis, many are determined not to make that mistake again. And so they manage to lose money when the market crashes but to not make it up when prices recover. The spring weakness this year scared them again, and the recovery was not reassuring. Every month since prices hit bottom at the beginning of July has seen net withdrawals from stock funds.

This is the rally that few believed and many missed.

Floyd Norris, the chief financial correspondent of The New York Times and The International Herald Tribune, covers the world of finance and economics.

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This Is The Rally That Few Believed and Many Missed

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