Some Investors Remain Fearful of a Strong U.S. Stock Market

Why are some investors so skittish about U.S. stocks?

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The U.S. stock market, as measured by the S&P 500, is about to finish its sixth year in a row of positive returns. The last three years have each had double digit returns. In the past, periods of positive performance have resulted in inflows to U.S. stock funds, according to a study by the Federal Reserve Bank of St. Louis. You would think money would be pouring into U.S. stock funds.

You would be wrong.

Bloomberg News reported that $157 billion flowed into U.S. stocks in 2013 as the S&P 500 index soared more than 30%. Investors have pulled $13 billion back out of stocks so far in 2014 through the end of September – $5.8 billion in August alone. The S&P 500 index had gained nearly 11% through the end of October 2014.

Why are investors so skittish about U.S. stocks?

Lately, it seems that stocks funds with a global focus are the investment of choice. Investors have added money to global funds every month in 2014, according to the Investment Company Institute as reported in October 2014.  Despite historically low interest rates in the United States, thanks to the Federal Reserve’s stimulus policy and U.S. companies buying back their own stock in near records levels, investors appear to prefer going overseas. Ironically, the U.S. stock market as measured by the S&P 500 has outperformed the international markets as measured by the MSCI World index  excluding U.S. stocks, in every one of the last five years.[1] In 2014, the S&P 500 index is up more than 10%, while the MSCI World index is down slightly through the end of October.

Some analysts are calling this market the most unloved rally of all time. The “tech wreck” of 2000–2002 followed by the “great panic” of 2008–2009, have left some investors wary of investing in stocks of any kind. This situation reminds me of one of my favorite quotes from Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful.”

Investors appear to us to still be very fearful of U.S. stocks.

[1] The MSCI World is a stock market index of 1,612 ‘world’ stocks.  It is maintained by MSCI Inc., formerly Morgan Stanley Capital International, and is used as a common benchmark for ‘world’ or ‘global’ stock funds. The index includes a collection of stocks of all the developed markets in the world, as defined by MSCI.  The market capitalization weighted index is designed to provide a broad measure of equity-market performance throughout the world.

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