Stocks' Run Draws Yawns From Buyers

[http://finance.yahoo.com/banking-budgeting/article/109003/stocks-run-draws-yawns-from-buyers]

One of the most powerful bull markets of all time hits its first anniversary this week, and individual investors hate U.S. stocks almost as much as they did when the market was tumbling to a 12-year-low last March.

That isn't surprising given the other anniversary coming this week: the euphoric peak of the technology-stock bubble, which set off what would be the worst calendar decade for stocks in history.

But a look at where investors are putting their money shows some important changes in behavior. The old habit of buying on the dips is gone; investors have been willing to take on risk in the past year, buying 'junk' bonds and emerging-market stocks, even as they shun their old bread-and-butter stock holdings; and there are signs they might turn back to stocks at a moment when performance tends to be weak.

In 2010, investors around the globe have pulled $15.3 billion out of U.S. stock funds, according to data from EPFR Global, which tracks money flows. Meanwhile, roughly $2 billion has gone into emerging-market stocks -- after inflows of $65 billion last year -- and $20 billion into U.S. bond funds.

Especially notable is the aversion that individual, presumably longer-term, U.S. investors have had to their own stock market.

This year, $4.6 billion has been pulled out of U.S. stock mutual funds, according to the Investment Company Institute, whose data doesn't include exchange-traded funds. At the same time, world equity funds have taken in nearly $14 billion and bond funds more than $56 billion. This comes after investors pulled more than $53 billion out of U.S. stock funds in 2009.

This is a far different pattern than in the wake of other recent bear markets, where investors had viewed market declines as a chance to buy cheap stocks that would inevitably rise.

"Typically, investors eventually react to new bull markets with significantly higher new cash flow into equities," according to a study of investor behavior released last week by Vanguard Group. As stocks began to rally from the lows of March 2003, investors added $152 billion to stock funds in the course of the year, the study said. Those inflows tended to increase as the rally extended.

Investors say any enthusiasm about the rally is tempered by uncertainty in Washington, on the economy and on housing markets. And with baby boomers edging closer to retirement, there is less desire to take a chance on U.S. stocks.

"We don't have estate-tax rules, we don't know what's going to happen with income-tax rates and dividend taxes, and health care is a very big cost issue," says Neil Hokanson, a Solana Beach, Calif., financial adviser.

For the past two years, Mr. Hokanson has sat down with a small group of long-time clients as a sounding board for ideas and to gauge sentiment. Last summer, he says, their focus was on how they could participate in the rally. When they met recently, it was a different story. "They were very, very nervous about the markets and the future of the economy," he says. "Concerns about deficits and government spending have really taken hold."

"Their instructions to us are 'preserve my capital,'" he says.

There are some hints that the aversion to U.S. stocks may be fading. EPFR's data showed U.S. equities taking in more than $5 billion in mid-February before tailing off at the end of the month. At the same time, high-yield bond funds, which had attracted $21 billion last year, had $1.7 billion head out the door.

Among financial advisers polled by Charles Schwab in January, there was less interest in adding to bond positions. The survey, released last week, found 16% planned on investing more in bonds, down from 25% in July and 42% last January. Still, enthusiasm for U.S. stocks wasn't high: 26% planned to invest more in large-cap U.S. stocks, down from 30% last summer.

Early this year, Deutsche Bank strategist Binky Chadha argued that another solid quarter of earnings could soothe individual investors' concerns about U.S. stocks. The market had moved higher after each previous good quarter, and in fact, fourth-quarter earnings far exceeded expectations.

However, Mr. Chadha says, investors were distracted by other events. "We got three negative shocks in relatively quick succession," he says, pointing to the clamping down on bank lending by China, Greece's debt woes and events in Washington.

Some investors are viewing normally volatile emerging markets as something of a haven because of their long-term growth prospects and faster recovery from the recession. "If your assumption is that something in the U.S. is broken, then you put your money into something that isn't broken," says Mike Ryan, head of research at UBS Wealth Management Americas. "If you think about the aftermath of the crisis and the many structural problems in the developed world … a lot of the emerging markets are not being plagued with those problems."

Some believe investors will return to U.S. stocks just at the time when interest rates start to rise, typically a weak period for stocks. The logic is that bonds will get hit by rising interest rates and the decision to raise rates will mean the U.S. economy is on solid footing, in particular the job market.

"Wider participation in the equity rally ... will take a change by the Fed toward a tightening that will drive an asset allocation shift in flows away from fixed income and into equities," Deutsche Bank's Mr. Chadha says.

But advisers say it seems likely to be slow going before clients feel comfortable with the risks of the U.S. stock market.