Is it just the normal tendency of global markets to move in tandem into favorable season rallies from November to May (click here for details Seasonal Patterns in Global Markets) or perhaps the end of China’s severe bear market, which has been underway since 2009?
The debate is becoming noisy.
On the fundamental side those who are bullish point to the improving economic reports of late from China, indicating its economy may not be coming in for a hard landing after all. And hope that the newly installed regime will undertake the stimulus efforts that the outgoing regime seemed to be putting off pending the government changeover.
But those who are bearish point out that with China’s Consumer Price Index coming in 2.5% higher in 2012 than 2011, the previous fear of rising inflation may return and prevent the new regime from considering cutting interest rates and other easier money policies.
We prefer to use charts and technical analysis of the degree of momentum and money flow reversals, etc.
But one of the bearish takes on the situation caught my attention, (along with wonder at how many form opinions apparently without checking on how markets actually work).
A Bloomberg commentator says he has identified a problem with the rally in China:
“A lack of new investors in China may indicate that the ongoing rally is hollow. The number of funded brokerage accounts slipped to 55.1 million in the week ended December 28, the lowest level since November 2010. That was the 5th consecutive week of declines for brokerage accounts. The drop in accounts may indicate that domestic investors don’t expect the current rally to last.”
Okay, except that investors bailing out of a market, closing accounts (and swearing off the damned market for good), usually takes place after a bear market has ended.
Don’t believe me? That’s the history. I won’t go all the way back to the 1929 crash. But just looking at the last 40 years or so, investors continued to pull money out of the stock market for several years after the 1973-74 bear market ended, after the 1987 crash, after the 1990 bear market, after the 2000-2002 bear market, and most recently after the 2008-2009 bear market. Buy high, sell low.
As the Capital Observer website reported a couple of years ago, “The largest ever inflow of net new cash into U.S. equity mutual funds at the time, occurred in the first quarter of 2000, when retail investors sent fund managers over $130 billion of new capital precisely at the top of the 1991-2000 bull market. And then record outflows of over $70 billion occurred in the third quarter of 2002, at precisely the low of the 2000-2002 bear market. It continued the timing of retail investors as uncanny, but also quite unfortunate, as they have been consistently wrong.”
The pattern is confirmed by this chart from the Investment Company Institute (ICI). The columns represent inflow in $billions into equity mutual funds each year.
As it shows, although the 1991 to 2000 bull market had been underway for five years (and the S&P 500 was already up 106%), it was not until 1996 that investors began to put money back into the market to any degree. They then poured increasing amounts in all the way up to the market peak in 2000, and continued to, reaching a record inflow in 2001, after the severe 2000-2002 bear market was well underway (in its 2nd year), still apparently not aware of what was going on.
Then only after the 2000-2002 bear market ended in 2002, and the stock market launched into its next bull market, the bull market of 2002-2007 (in which the S&P 500 more than doubled over the next five years) investors began pulling money out of the stock market. Still licking their wounds and fearful, they continued to pull money out of stocks and mutual funds in 2003, staying out in 2004 and much of 2005.
As the Investment Company Institute reported at the time, “The mutual fund industry had a net cash outflow in 2003, its first for a full year since 1988.” (1988 was also the year after the 1987 crash and bear market ended).
So investors again followed their longtime pattern of buying high and selling low relative to bull and bear markets.
Note that the pattern has continued to this day. As the ICI table shows, after bailing out after the 2000-2002 bear market had ended, they had no interest in the market until roughly 2005. Then belatedly seeing the profits they had been missing out on, investors began to pour money back into the market in 2006, and picked up their enthusiasm to a new record inflow in 2007, precisely at the peak of yet another bull market.
Then unbelievably, as also shown in the ICI chart, once again they continued to pour money in at a fairly heavy pace in 2008, the year of the severe global financial system collapse and bear market.
And, not shown in the table that only goes to 2008, but as has been reported often, investors have been pulling money out of the stock market at a very heavy pace every year since the current 2009 bull market began.
So, yeah, you can argue either way regarding China’s bear market potentially ending, but I would not include the fact that China’s investors are bailing out of their market at this point as necessarily being a negative sign.
On the need to learn more about how markets actually work.
In a recent article Investors Are Not Dumb! I quoted some studies indicating that investors who are very well educated and experienced in their own fields and careers, tend not to see a need to learn just as much about investing and how markets work, while risking their savings from their successful careers. From that article:
“A survey by the Securities Investor Protection Corporation (SIPC) in 2001 revealed that 85% of U.S. individual investors (which we’ve already acknowledged are in the upper percentile of the population for brilliance and success in their lives and careers) were unable to pass a simple five question investment ‘survival’ quiz.”
“In 2009, the Investor Education Foundation of the Financial Industry Regulatory Authority (FINRA) conducted a similar investor survey. Interestingly, 67% of respondents rated their own financial knowledge not as average but as high. Yet by far the majority failed FINRA’s test of their knowledge of even the most basic of financial questions.”
“In 2012, the Securities & Exchange Commission published a report on financial literacy among non-professional investors. Its conclusion was that “U.S. investors lack basic financial literacy, and have a weak grasp of even elementary financial concepts.” Of even elementary financial concepts! Yet the majority rate their financial knowledge as high.”
The FINRA Foundation notes that if the majority of investors lack even elementary investing concepts, yet rate their knowledge and competency as high, it makes it difficult to change the pattern of under-performance. They don’t see the need to learn more.
Charles Munger, Warren Buffett’s famous right hand man, and Vice-Chairman of Berkshire Hathaway, weighs in on the subject. He said;
“I have said that in my whole life I have known no wise person over a broad subject matter who didn’t read all the time – none – zero.
I know all kinds of shrewd people who by staying within a narrow area, do very well without reading. But investment is a broad area. So if you think you’re going to be good at it and not read all the time you have a different idea than I do.”
Our subscribers seem to agree.
To read my weekend newspaper column click here: Transportation Stock Breakout Is a Good Omen For the Economy!
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