If Retail Investors Keep Dumping Stocks, Who’s Buying?

A concerned trader on the floor of the New York Stock Exchange.
Timothy A. Clary | AFP | Getty Images
A concerned trader on the floor of the New York Stock Exchange.

Time for my quarterly rant on equity fund outflows (stop me if you've heard this, oh never mind, just listen).

Equity mutual funds will likely see net outflows again this quarter. It won't be a lot — about $4.8 billion, according to TrimTabs.com, but it will be outflows.

The last time there was significant inflows were in Q1 of 2011, and what happened after that? The European debacle in July and August. After that, fuggedaboutit! Outflows!

In fact, it's worse than that: the last quarter there were significant inflows before Q1 2011 was Q2 2008, when there was about $11 billion in inflows.

Before that: Q1 2007, with inflows of $19 billion.

So here's the score: in the last five years, three quarters with significant inflows, 18 quarters flat or with outflows.

Hm. And you wonder why I rant.

When will the investing public show interest in stocks? They need to be generating enough money from wages and salaries to have money to invest. It looks like much of the stock outflows is going to pay bills.

This makes sense, because the two areas money has been going into are bank savings accounts and bond funds.

Here's a different question: if retail investors keep taking money out, who's putting money in? The S&P 500 is up 11 percent (for the second straight quarter!) — somebody's putting money in. You still need to have more buyers than sellers; the law of supply and demand has not been repealed (I think).

Either that, or there's less stock. And I think that's largely the answer.

There's a huge source of cheap money out there: the Fed. Companies are borrowing at low interest rates and using some of that money — to buy back shares.

There has been an average of $40 billion a month in buybacks announced going back to last August, according to TrimTabs. Is there any signs that buybacks are slowing down? On the surface, no.

So far in March: about $44 billion in buybacks have been announced, but much of it was related to specific stocks: $23 billion in buybacks announced on March 13 and 14, much of it from banks passing the stress tests, along with a $10 billion buyback from Apple (and that will only start in 2013). Other than that, only $11 billion other buybacks were announced in March.

The concern: the number of buybacks has slowed, even with the dollar amounts still coming in around the average.

What about other investors? Insider buying is not increasing dramatically. Pension funds have been selling, according to TrimTabs.com, which does a quarterly survey. Q4 of last year saw the largest outflows from pension funds of U.S. equity funds in several years.

Bottom line for stock investors: keep hoping that buybacks continue, and that bonds are at an inflection point.

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