When Wall Street's Bullish, Investors Head for the Exits
CNBC.com Senior Writer
All of Wall Street's wildly bullish calls on stocks may be having just the opposite effect, driving wary mom-and-pop investors out of the market despite the long-standing rally.
After all, they've been down this road before: One big-name analyst after another advocates a buy, buy and buy some more strategy, only to see a bubble burst that ends up trapping late-to-the-game individual investors.
True to form, Wall Street's biggest investment houses have been marching to the podium with avid encouragement to put money to work.
Goldman Sachs' Peter Oppenheimerdrew headlines Wednesday for releasing a note in which he says stocks are presenting a once-in-a-generation buying opportunity. Similarly, Bank of America and recently have taken up their full-year projections for the Standard & Poor's 500 . JPMorgan Chase has remained strongly bullish, and BlackRock CEO Larry Fink several weeks ago said investors should have a total allocationto stocks.
The admonitions haven't worked among retail investors.
In just the last week alone investors pulled another $126 million out of stock-based mutual funds and shoveled $10.7 billion into bond mutual funds, according to the Investment Company Institute.
The total outflow from stock funds was comparatively small to recent weeks, but the move is significant in that U.S-based stock funds, despite a stunning gain of more than 30 percent off the October lows, lost nearly $1.4 billion.
"There's a feeling that another shoe is going to drop somewhere, and they don't want to be caught in a situation where they can't get out," says Quincy Krosby, chief market strategist at Prudential Annuities in Newark, N.J. "What they don't want to get involved in is some trap that is being set by hedge funds or asset managers to get in so (the managers) can get out."
Retail investors can be forgiven for feeling a little shell-shocked.
They just survived a decade in which two major bubbles popped — the dotcom mania and the subprime mortgage frenzy — and they worry that the stock marketnow is being fueled again by easy money from the Federal Reserve that ultimately will run out and leave them holding the bag.
"A lot of people are very skeptical. Look how wrong these guys were last year," says Kathy Boyle, president of Chapin Hill Advisors in New York. "The average individual is feeling there's a lot of propaganda going on."
Indeed, consensus forecasts in 2011 were looking for the S&P 500 to finish around 1,400 when in fact it registered an almost perfectly flat 1,257, a 10 percent miss.
Investors may have had a strong sense of deva vu — that was almost exactly where the index registered on Jan. 20, 1999.
"They suffered through everybody being bullish and telling them they could not lose at the top of the Internet bubble, then they suffered through everybody telling them you could not lose at the top of the financial bubble," says Walter Zimmerman, senior technical analyst at United-ICAP in Jersey City, N.J. "At this point, they're way past once-burned twice-cautious."
Of course, the retail reticence in the market is about more than not trusting Wall Street bullishness. But it certainly appears to be playing a role.
Zimmerman believes the depletion of U.S. savings accounts has made less money available for investors to put in the market.
Boyle, meanwhile, says mutual fund flowsmay not be painting an entirely correct picture about retail participation, given that many have flocked to exchange-traded funds.
Yet U.S.-based mutual funds actually have attracted more assets even as the ETF field has bloomed to a $1.2 trillion industry. Mutual funds held $8.6 trillion in assets as of February, an increase from just under $8 trillion in 2011, according to Morningstar.
The rally, then, appears in large part to be driven by the high-frequency trading platforms that big investors use, as well as a burgeoning level of corporate stock buybacks.
Repurchases hit an 11-month high of $5.3 billion a day last week and have totaled $33.5 billion in March alone, with big banks that cleared the Fed stress tests the most active participants, according to TrimTabs.
So what will bring mom and pop back into the fold?
Prudential's Krosby thinks more consistent improvements in the economic data, along with a surge in dividend offerings and a better entry point that would come with a healthy correction could entice the retail investor.
"If we were to see a pullback, a consolidation, then you might see many of the investors come in, provided the economic data continue to remain solid," she says.
"What doesn't help is when you hear CEOs or asset managers saying, 'Start pushing all your money into equities.' They look at that as suspect," Krosby adds. "They see those comments as a marketing ploy to lure them in, and they're very suspect of headlines like that."