Money Matters ... Why persistent lack of faith in the market?

By Kevin Fusco
The Daily Record Newswire

The New Year has started with a bang for equity investors; it’s just a shame there aren’t that many around anymore. Still shell-shocked from the credit crisis and bear market of 2008, many longtime stalwarts of equity investing are resolutely sitting on the sidelines, convinced that the recovery is fragile and that stocks are due for a pullback.

They may be right, and stocks do look primed for a pullback, but this is the same story equity doubters have been spinning for four years now. Their logic has not changed, and the longer they hold on to the notion of an inevitable correction, the closer they get to being right. Corrections are a natural part of the market cycle, and avoiding them can help to bolster returns, but it is also important to weigh the cost of waiting on, or doubting, the equity markets.

The S&P 500 Index fell 37 percent in 2008 and continued to fall heading into 2009. There was very little positive news coming from any direction. Major
corporations were failing, the government was scrambling and investors were scared. This fear led many to abandon the equity markets in search of safe havens, of which few were to be found. Based on the record levels of cash and cash alternatives that existed for years to come, it is safe to assume that many of these investors were absent when the equity markets began their nearly four-year recovery in March 2009.

Close to an all-time high

Since the market low on March 9, 2009, the S&P 500 has gained just over 100 percent, effectively doubling, and now hovers close to its all-time closing high from October 2007. More importantly, the index is more than 200 points above credit-crisis levels of 2008. The means that investors who were patient, resisted the urge to flee the tough times of 2008 and maintained their allocation to equities should be in a better place now than before the credit crisis and bear market transpired.

The S&P 500 has returned 26.46 percent, 15.06 percent, 2.11 percent and 16.00 percent, respectively, over the past four years on a total return basis through the end of 2012. These returns have been scoffed at by doubters who label the gains as a fluke or the continuation of an “artificial” market created by accommodative monetary policy or government intervention. Regardless of the cause, the returns have been real, and anyone not invested in the equity markets has missed out.
What is even more shocking is the lack of faith investors have in the equity markets even as the recovery continues. Based on fund flow information provided by Morningstar, outflows from actively managed domestic stock funds in 2012 surpassed those seen in 2008 at the height of the credit crisis. Four years into the recovery, one could make the case that now is the time to reduce equity exposure and realize gains, but the numbers tell a different story.

Flowing away

Outflows from U.S. stock mutual funds have been consistent for the past five years, with an estimated $393 billion leaving actively managed funds. The rise in popularity of passively managed exchange traded funds (ETFs) has prompted some of this exodus, but even adding ETF flows into the calculation, large cap domestic funds have still experienced a reduction in assets of approximately $175 billion. As Syl Flood at Morningstar stated in a recent article, “Investors haven’t just sat out the uneven stock market rally that began in March 2009; they have run from it and never looked back.”
Five years after the 2008 bear market, many investors are still struggling to make sense of the equity markets. For those who have waited this long to find the confidence to again invest in stocks, timing becomes critical. After four years of gains, the equity markets are probably due for a pullback. Some expect a slight correction, while others still hold on to the belief that we will fall back to 2008 lows. Regardless, if even recent history has shown us anything, it’s that trying to time the eventual high and low points in the financial markets is very difficult, if not nearly impossible. Investors still waiting for the perfect time to get back in have let some tremendous returns pass them by.
Kevin Fusco is a vice president of Fusco Financial Associates Inc. of Towson. He can be reached at (410) 296-5400 or