Excerpt: US Equity Mutual Funds

Equity mutual funds tend to reflect the sentiments and activities of retail investors. Here are some observations:

(1) Cumulative net inflows rose $2.7 trillion from the end of 1991 to peak at a record high during December 2007. Since then, the net outflow from equity mutual funds has been $247 billion. These flows suggest that the individual investor participated in the previous two bull markets, but did not do so during the current bull market, which has been driven mostly by corporate cash flows.

(2) Net inflows on a 12-month basis tell the same story and show an interesting correlation with the S&P 500. Such inflows rose dramatically from close to zero during 1991 to peak at $366.6 billion during September 2000. They then plunged and turned negative during the second half of 2002 and the first half of 2003. They were back in solid positive territory until turning extremely negative again during the second half of 2008 and the first half of 2009.

The swings in these flows clearly contribute significantly to the movements in equity prices from 1991 through early 2009. Since then, there has been a huge divergence, with net outflows on average, yet with the S&P 500 rising nearly back to its record high.

Today's Morning Briefing: Nothing to Fear but Nothing to Fear. (1) Fully invested bears worrying about too many bulls. (2) A red flag signaling that the bull will be gored? (3) Bull makes front page of NYT. (4) The fourth phase of the bull: Exuberance. (5) Worrying about missing a melt-up. (6) Corporate cash flows, not investor flows, driving bull up to now. (7) S&P 500 tracking buybacks plus dividends. (8) Retail investors may be ready to join the party. (More for subscribers.)