I could not have said it better myself so I will paste the following comment, posted recently on Marketwatch about the huge surge in mutual fund inflows. Adventurer574 suggested that each bull and bear market is beginning to be identifiable through four basic indicators.
The first he writes: “phase of rally – Wall Street invests with hundreds of billions of stolen taxpayer money driving the market higher.” This is bit pointed and hides a few basic facts but the germ of truth is definitely there. It has been well documented and continues to be investigated.
But the resiliency of the American economy is not as strong as one would believe. There would have never been the need to step up and with a “too-big-to-fail” policy if it was.
In the time between his description, almost haiku in length, much of the money has been paid back and estimates of actual profits on some investments have led folks to believe that optimism is the new black. At least it doesn’t appear to be red ink.
The second phase he suggests would be occurring right now. He (she) writes: “Massive reporting & fraudulent economic news designed to lure individual investors to buy over-priced stocks.” Although it is unclear what reporting and economic news is out of the ordinary (this sort of news is offered by the various agencies who track economic happenings is regularly released, good or bad) and the revisions that follow are almost as expected. These snapshots do increase optimism if they are portrayed in the media as news better than it really is. And credit may be taken where it is not due.
But investors, at least the seasoned ones are always skeptical. Those who were not, retreated to the safety of more conservative investments after the fall and have only just begun to realize that they may be too conservatively invested to reach their still-lofty retirement goals. The return, albeit slowly of the company match may have had some impact in the swelling coffers of many mutual funds. Another inflow effect may be coming as a result of rollovers from 401(k) plans to IRAs.
And as the recent Strategic Insights report, the Federal Reserves monetary policy has kept money market investments at near zero in terms of yield, the options are limited only to getting back in the market. There has been a correlation between ETF inflows and market volatility, particularly at the close of trading. On a global scale ETF assets under management have now topped the trillion dollar mark. The report notes that much of those inflow dollars is headed toward taxable bond indexes.
The next phase involves the talking heads, the ones who visit the business channels and regularly pop up as experts in the media. Although many stations to reveal possible conflicts, the message they send is one of opportunity missed, particularly if you wait to get in now. They may be crying doomsday when the government debt is involved, but the ever-revealing mindset that Wall Street has become does not give many of us pause.
We invest because everyone eles is. And their warning, if it does happen, will not be readily made available to the public until after the fact. He (she) writes: “Wall street dumps their stock at high prices at the same time they’re telling Grandma & the average Joe what a great investment they just made.” In other words, the best clients get the best advice first.
And the aftermath is often brutal. Even if financial reform does take root, the systemic problem that still motivates Wall Street to do what it does repeatedly will remain. New methods (for finding and capitalizing on risk) will be devised and most of us will hear about it much later, often when the slide has begun and we are caught unaware.
Their final two pieces of wisdom doesn’t reveal much in what would be considered new information: “When the market bottoms – Wall street laughs & repeats.” Adding “Don’t be Grandma & the average Joe.”
The average investor will always wonder what they missed and how to not miss it next time. They believe they can, at least to some degree, make intelligent moves at the right time. And sometimes they do. Sometimes doing nothing, as many portfolios have witnessed means your recovery is much quicker. But in no way can you replicate it time and again.
This doesn’t mean you need to be too cautious. But it does mean you need to know more than what the sources of your financial information are telling you.
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