Fund Investors Are Stressing Out

Posted by: Ben Steverman on January 23, 2008

One way of tracking how individual investors are feeling about the stock market is to watch the flows into and out of mutual funds. TrimTabs Investment Research keeps an eye on this data.
Remember August? A full-blown financial crisis hit credit markets and U.S. stocks fell rapidly from July’s record levels. In that month, about $15.5 billion was pulled out of equity mutual funds by investors, TrimTabs says.
By now, those are looking like the good old days.
Investors put money back into funds in September and October as stocks seemed to recover from the crisis.
Then in November, stress levels started to rise again. Investors pulled out $10.88 billion in November, and then a whopping $28.83 billion left all equity mutual funds in December. That December figure was the highest in five years, since the end of the last bear market in 2002.
New data released today by TrimTabs shows the outflows continue to mount at a rapid pace. As of Jan. 22, more than $43 billion has left mutual funds so far this month.
What’s going on here? I have a theory after the jump.

While professional investors have been worrying about crisis and recession for months, the clear and present dangers to the economy and stock market has only become apparent to individual investors in the last several weeks. The worry level has jumped further recently, especially as everyone started talking about government economic stimulus plans. By everyone I mean President Bush, Federal Reserve Chairman Ben Bernanke, congressional leaders, presidential candidates and even my mother. Economists and investors might have been fussing over the economy for months, but it took a while for that to spread. Now it's hard to find anyone anywhere in the U.S. who isn't at least a little bit worried about a recession.
(The usual caveats: It’s rarely a good idea for long-term investors to react to headlines and pull out of the market at times like this. Also, while many think the economy is slowing, it’s not yet clear that a recession is coming.)

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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