Insights & Advice

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What Dip?

Last week it appeared the markets were in for a rough period. Stock averages swooned on the news that Goldman Sachs was the target of a law suit by the government. At the same time, rumors of further problems with Greece’s finacial health were making investor’s jittery. The stock market had reached a critical level where a correction was overdue. So I was expecting a pullback of at least 5% or so. Wrong!

The resilience of this market in the face of bad news is breath taking. Of course, a dose of great earnings announcements this week has helped. Wherever you looked, from retail to technology, upside earnings surprises have been the order of the day during this first quarter earnings season. This has been especially impressive since analysts had already raised their earnings estimates for many companies considerably from last quarter. As a result, every attempt at a sell-off was met with additional buying. Conceivably, rather than just sell off, the markets may just back and fill a bit to work off any excess exuberance before moving higher.

“It’s hard to find any negative news on the economy,” said one long time client of mine from Great Barrington this week.

This was an interesting comment given that the same client recalled that a year ago (when we discussed getting back into the market) he was extremely nervous about both the economy and the markets.

“Back then, it was all gloom and doom and it was hard to ignore it,” he admitted, “although I’m glad I did, in hindsight.”

He is right on both counts. Strong home sales, declining jobless claims, IMF reports on the growing strength of the global economy, tame inflation, low interest rates, rising profit forecasts from the nation’s blue chip companies, what’s not to like?

As you may recall, I and everyone else in the universe, have written about the notable absence of retail investor participation throughout this market rally. Volume has been anemic for the last year as “Ma and Pa” either remained in cash or bought bond funds ($35 billion in the fourth quarter alone). They abstained from getting burnt in the stock market once again after their debilitating experience in 2008 and Q1 of 2009.

So I’ve been watching the flow of funds back into equity for some time and have reported in the past some hopeful sings that the general public might be dipping their big toe back into stocks and stock mutual funds. During the first three months of this year, investors continued to buy bond funds but at a lower rate ($26.6 billion). Meanwhile, equity funds and exchange traded funds had positive inflows of $132.9 billion in the first quarter, pulling $324.4 billion off the sidelines and out of near-zero interest rate money market funds. In the first week of April bond funds were still garnering the lion’s share of money ($6.5 billion) but stocks were not far behind ($4.84 billion).

The return of the retail investor may well be the reason that the stock market, even at these lofty levels, is continuing to climb higher. Those investors, who have been sitting on a pile of cash for over a year, waiting for a clear sign that the economy is recovering, may finally believe the time has come to go back into the stock market. If so, I suspect we would then have the firepower necessary to breach the 1,300 mark on the S& P 500. That would be a stupendous gain from the low of 666 back in March of 2009. I would continue to expect some dips from time to time along the way but if the retail investor decides to join the party, I’m betting 1,300 is entirely possible.

Posted in A Few Dollars More, At the Market