Retail investors just poured a record $77.4 billion into the stock market.
To put this in perspective, the prior record – set in February 2000 – was just $23.7 billion.
You can probably guess how that turned out…
This whoosh of money into stocks happened mere months before the
dot-com crash that wiped out billions in shareholder wealth… and took
the Nasdaq down by 78% from peak to trough.
Mainstream pundits take these big inflows as a sign of something called the “Great Rotation.”
No. This doesn’t refer to some new form of farming practice. It is a
“rotation” because supposedly there is an imminent shift of investor
money out of bonds and into stocks. And it is “great” because it will
supposedly cause stocks to shoot to the moon.
And it is all over the news, because you’re supposed to hop aboard and pile into the stock market
Watch out. This is not only a market cliche. It’s sloppy… even dangerous… thinking.
First, that retail investors are pouring record amounts of money into stocks four years into a bull market
is not exactly comforting. You already know about the last time
investors poured a record amount of their savings into stocks. They
couldn’t have picked a worse moment. (We imagine the 1664-67 Tulip
Bubble and the South Sea Bubble in 1711 saw similar big inflows the late
stages too.)
Second, the Great Rotation theory seriously misunderstands the nature
of markets. For every buyer of stocks there is a seller. And for every
seller of bonds there must be a buyer. Assets change hands. But somebody
still owns each and every outstanding stock and bond (unless they
somehow slip down behind the sofa).
So, although retail investors (aka the “little guy,” aka “mom and
pop,” aka the “dumb money”) may be pouring unprecedented wads of cash
into stocks, somebody somewhere is taking the other side of the trade.
Just as somebody somewhere took the other side of the trade in February
2000, in the last great stampede into a mature bull market.
Our outlook hasn’t changed…
The Fed and other central banks
are doing a rather wonderful job of stirring up animal spirits among
the financier class by evaporating yields on fixed income and pushing
the yield-hungry investors further out the risk spectrum.
But they are still unable to jump-start the middle class
– who not only can’t get a decent yield on their savings accounts
thanks to central bank intervention, but also have to deal with a real
economy that is limping along at stall speed (or in the case of the most
recent quarter, at “recession” speed).
It is difficult to resist following the crowd when it starts to stampede. But it is usually prudent to do so.
As a long-term wealth builder, you need to be wary of chasing mature
bull markets. And of investing alongside the mainstream. This is the
core of Warren Buffett’s advice: “The less prudence with which others
conduct their affairs, the greater the prudence with which we should
conduct ours.”
Keep this in mind as you’re barraged with bullish commentary on the so-called “Great Rotation.”
By Chris Hunter
http://www.
