This commentary originally appeared at 8:34 a.m. EDT on May 1 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.
In recent months, governments around the world have begun to increase monetary stimulus and initiate other pro-growth measures, while in those countries having fiscal austerity imposed on their populations, there are the seeds of revolt as the pain has become, in many cases, unbearable. As a result, governments are falling left and right.
Stepping back from the daily flood of news releases, it would seem that out of the current turmoil, the global economy is bottoming out and is in the early stages of what should be a long period of rising prosperity. The ultimate driving force, whether maintaining the standard of living of the American middle class or bringing billions in the Third World out of poverty, will mandate a global drive for growth.
Well-managed multinational corporations will be both the enablers and the principal beneficiaries of successful pro-growth initiatives by the politicians and bureaucrats. The ironic tragedy of all this is just how few investors are likely to benefit from it and how badly those hiding in bonds will get burned when faster growth and tighter monetary policies return.
-- Stefan Abrams, Bryden-Abrams Investment Management monthly commentary
Against many odds, the rally in the U.S. stock market has continued into 2012.
Particularly odd is that the more than doubling in the S&P 500 has been ignored by retail investors as their appetite for investment in the U.S. stock market continues to be almost nonexistent.
Nevertheless, it remains impressive to me that stocks are doing well despite retail investors' liquidation and their absence of participation.
To me, there is an inevitability that they will return (albeit slowly).
The Investment Company Institute reports that March outflows from stock funds totaled $9.62 billion compared to an inflow of $1.38 billion in February. That figure included $2.02 billion of funds committed to non-U.S. equity markets, however, bringing the outflow from domestic equity funds to $11.63 billion in March compared to an outflow of only $1.66 billion in February.
Fixed-income funds continue to thrive, as highlighted by an inflow of nearly $3 billion in March into high-yield funds vs. an inflow of over $5 billion in February.
I have previously highlighted the reasons for $450 billion of domestic equity outflows since 2007:
- a lost 13 years of investment returns (since 1998);
- two large drawdowns in the U.S. stock market since 2000 -- these were two of the only five greater-than-40% stock market drops since 1900;
- a flash crash (whose origin is still unknown);
- the shock from the depth of the Great Decession of 2008-2009;
- a 35% nationwide drop in home prices, limiting the opportunity for home equity loans and cash-out refinancing;
- tax, economic, political and employment uncertainty;
- the impact on volatility created by high-frequency trading strategies and leveraged ETFs; and
- the continued threat of screwflation of the middle class -- as wages stagnate and the cost of the necessities of life continue to rise, stocks become less of a priority.
As I discussed in yesterday's opening missive, the outlook for the U.S. economy and its consumer base is markedly better in 2012 than it was in 2011, and there are substantive reasons to believe that the individual investor will return to the U.S. stock market in the fullness of time. (Hat tip to Gary Shilling for the charts below.)
- Share prices continue their ascent.
- Domestic economic growth appears to be muddling through, and the threat of recession is low.
- The consumer has deleveraged -- household debt as a percent of GDP has dropped down to historic trend levels, household debt as a percent of disposable income is at a five-year low, as are debt service and financial obligations ratios.
- Employment is slowly but steadily improving.
- The global playing field is leveling, as labor costs increase in China and in other emerging markets just as factory automation is slashing labor costs in the U.S.
- The U.S. housing market has stabilized in price and turnover.
- Corporate profit growth is beating consensus forecasts.
- Inflation is moderating.
- Bill and bond (interest) rates are at historically low levels and provide an inferior alternative to savers and investors.
For now, stocks are doing surprisingly well without retail participation.
It remains my contention that it will take relatively large losses in bond funds to bring back the individual investor into equities. But this is likely coming -- it almost always occurs coincident with higher stock prices -- and when it does, one of the greatest reallocations out of bonds and into equities will commence.
That reallocation could be the catalyst that takes stocks back to new all-time highs.
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