NEW YORK, NY – JUNE 14: Traders work on the floor of the New York Stock Exchange (NYSE) … [+]
Mutual fund investors fled about $180 billion worth of stocks in the 12 months through April, according to a new survey.
The news, released by industry group ICI (Investment Company Institute), said total withdrawals from foreign and domestic equity mutual funds in the January-April period were $179.4 billion, up 57% from $114.1 billion in the same period in 2023.
Stocks will become obsolete in early 2024
This coincides with disappointment among some investors who had hoped that the Federal Reserve would have significantly cut short-term interest rates by now, which have remained at 5.5% since July of last year. Many investors had been putting money into interest-rate sensitive assets ahead of the expected rate cuts, which have so far failed to materialize.
As most savvy investors know, the failure to meet expected stock price growth reflects the fact that stock market investments are risky, meaning the outcome is uncertain.
At the same time, mutual fund investors bought $107.9 billion in bond funds in the 12 months through April, up more than sixfold from $16.8 billion in the same four months last year.
Bonds attract mutual investors
Bonds are generally considered to be much less risky for investors because they typically pay interest coupons on loans and return the original capital to the lender, or investor. Although bonds are a safer investment in that you are sure to receive your principal and interest, the returns tend to be much lower than investing in stocks, at least over the long term (many years).
The difference in returns can be large. According to NerdWallet, the average annual return for stocks, including reinvested dividends, is about 10%. Bonds have an annual return of 4% to 6%, according to the FinancialSamurai website. And that’s where the recent phenomenon of outflows and inflows becomes interesting.
If bond returns have lagged stock returns so badly for decades, why have mutual fund investors, usually individual investors, fled from stocks?
One reason for this could be a switch to exchange-traded funds, which have cheaper annual expenses and allow investors to buy and sell assets at any time during the trading day.
But there’s a bigger problem: Individual investors often panic and sell off risky assets when markets don’t perform as well as they expected. In this case, the reason the market didn’t rise as expected is because the Fed didn’t cut interest rates as dozens of Wall Street wizards predicted. In this case, it makes some sense.
Other factors that may have prompted large-scale sales of shares from mutual funds include uncertainty about the outcome of the upcoming election and the stark policy differences between the two major parties.
But whatever the reason for retail investors selling off stocks, there tends to be an inverse correlation: when retail investors sell off stocks in large numbers, the market tends to hit a bottom, which is often followed by a rally.
If this relationship, odd as it is, holds true going forward, the recent sell-off could be seen as a positive for the S&P 500 index and the stocks held in the SPDR S&P 500 ETF, which tracks the index.
