As stocks set highs, in­vestors still worry about next crash

The Oklahoman (Sunday) - - BUSINESS - BY STAN CHOE AP Busi­ness Writer

What is the sound of a stock mar­ket at a record high and no­body buy­ing it?

Even with stocks in the midst of one of their bestever runs, in­vestors are on pace to pull more money out of U.S. stock funds than they put in for the third straight year and the eighth in the last 10 years.

The mem­ory of the fi­nan­cial cri­sis from 2007 into 2009 is still too fresh for many in­vestors, who watched stock prices plunge by more than half. Af­ter many sat out the en­su­ing, tor­rid rise for the mar­ket — the Stan­dard & Poor’s 500 in­dex has more than tripled since hit­ting bot­tom — they’re now won­der­ing if the next crash is im­mi­nent.

“It’s still one of the first things that comes up” when Brian Ja­cob­sen, chief port­fo­lio strate­gist at Wells Fargo Funds Man­age­ment, talks with clients and even some friends. “The ques­tion is: ‘When is the bub­ble go­ing to burst?’ I’ve been hear­ing that since 2012.”

An­other rea­son for cau­tion: Amer­ica’s in­creas­ingly wrin­kled com­plex­ion. Baby Boomers may be get­ting more con­ser­va­tive with their nest eggs and putting more money into bonds as they ap­proach or move fur­ther into re­tire­ment.

Through the first seven months of this year, in­vestors pulled a net $8 bil­lion out of U.S. stock funds. The fig­ures from the In­vest­ment Com­pany In­sti­tute in­clude in­dex mu­tual funds and ETFs, whose pop­u­lar­ity have boomed in re­cent years, as well as funds run by stock pick­ers look­ing to beat the S&P 500 and other in­dexes.

That hes­i­tance to in­vest comes even as stocks have at­tained new highs in a mostly gen­tle ride up­ward. The S&P 500 has al­ready set a record more than 30 times in 2017, with only a few big down days, due in part to a resur­gence in cor­po­rate-profit growth. Com­pa­nies them­selves re­main big pur­chasers of U.S. stocks, and for­eign in­vestors also have been buy­ing some.

The gen­eral skit­tish­ness about stocks is ac­tu­ally an en­cour­ag­ing sign to some on Wall Street, par­tic­u­larly those who fol­low famed in­vestor John Tem­ple­ton’s maxim that “bull mar­kets are born on pes­simism, grow on skep­ti­cism, ma­ture on op­ti­mism and die on eu­pho­ria.” There are in­deed many rea­sons to worry, the mar­ket’s high price chief among them, but at least there doesn’t seem to be any eu­pho­ria. If all the po­ten­tial buy­ers that re­main get lured into the fold, then it would be time to get wor­ried, the con­trar­i­ans say.

To see what eu­pho­ria looks like, con­sider the dot-com boom when day traders were brag­ging about get­ting rich quickly and in­vestors were scram­bling to join them. In 1999, in­vestors threw a net $188 bil­lion into do­mes­tic stock funds. The next year, when the S&P 500 peaked, it was nearly $300 bil­lion.

In the years run­ning up to the Great Re­ces­sion, fewer dol­lars were head­ing into do­mes­tic stock funds than dur­ing the dot-com bub­ble, but still more money was go­ing into the mar­ket than com­ing out. Now, the tide is in the op­po­site di­rec­tion. In­vestors pulled an av­er­age of nearly $24 bil­lion out of do­mes­tic stock funds an­nu­ally from 2008 through 2016.

In­stead of eu­pho­ria, strate­gists at Goldman Sachs say in­vestors are cur­rently be­tween skep­ti­cism and op­ti­mism.

The skep­tics have honed in on how stock prices have risen more quickly than cor­po­rate earn­ings in re­cent years, which means they look more ex­pen­sively val­ued than usual. One mea­sure pop­u­lar­ized by No­bel Prize-win­ner Robert Shiller says that the S&P 500 is at its most ex­pen­sive level since 2001. Not only that, but in­ter­est rates are ex­pected to rise, which the­o­ret­i­cally should lower how much in­vestors will pay for each $1 in cor­po­rate prof­its. Throw in the wild card that is Washington pol­i­tics, and in­vestors are feel­ing un­moored.

Even op­ti­mistic an­a­lysts are some­what cir­cum­spect, ex­pect­ing more mod­est gains than the roughly 14 per­cent that the mar­ket has de­liv­ered an­nu­ally the last five years, on av­er­age. But they point to the still-im­prov­ing econ­omy, and note the typ­i­cal U.S. house­hold is fi­nally mak­ing more in in­come than it did at the end of the last mil­len­nium, af­ter ad­just­ing for in­fla­tion. Other economies around the world are also grow­ing in uni­son, which helps lift prof­its for the big multi­na­tional com­pa­nies that dom­i­nate U.S. stock in­dexes.

The per­sis­tent growth of the U.S. econ­omy is one of two rea­sons that the Goldman Sachs strate­gists gave in a re­cent re­search re­port for why they see a sharp down­turn for stocks as un­likely in the near term. The other: “In­vestors are not com­pla­cent.” Fund man­agers are hold­ing onto about as much cash as they usu­ally do — they’d be more fully in­vested if they were more ex­cited — and in­vestor dol­lars flow­ing into stock-in­dex funds are be­ing off­set by the dol­lars flow­ing out of ac­tively man­aged funds.

In­stead of U.S. stocks, in­vestors have been more in­ter­ested in bonds. More than $235 bil­lion went into bond funds through the first seven months of the year.

That said, in­vestors haven’t given up en­tirely on stocks. A bit more than $151 bil­lion went into world stock funds through July this year, ac­cord­ing to the In­vest­ment Com­pany In­sti­tute. That move­ment may be due to the in­creased pop­u­lar­ity of tar­get-date re­tire­ment funds, which typ­i­cally make big in­vest­ments in for­eign stocks to di­ver­sify their port­fo­lios.

That’s counter to what many mom-and-pop in­vestors did when left to their own de­vices. Around the world, they’ve his­tor­i­cally been bi­ased to­ward stocks from their home coun­try.


The stock mar­ket is at a record, and no one seems to care. In­vestors are on pace to pull more money out of U.S. stock funds than they put in for a third straight year, and for the eighth time in the last decade.

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