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Ma & Pa Investor Are Back, But Are They Too Late?


After a 76% rise in the S&P, retail investors finally return to stocks.

Retail investors don't seem to agree with Gordon Gekko just yet that greed is good but, for the first time in a long time, they do seem more enthusiastic about US stocks.

During this headline-making stock market surge, individual investors have sidestepped the stock market, preferring instead to run headlong into fixed-income products.

Now there's evidence to suggest that, once again, they might be feeling some love for stocks in their own backyard.

In the first quarter, according to data we mulled over this morning from Lipper FMI, investors did keep on committing a lot of capital to bond funds: $92.6 billion in the first quarter, to be exact.

But, interestingly, your friends and neighbors also put some of their hard-earned money to work in US stock funds.

Domestic equity funds, excluding exchange-traded funds, had inflows of $13.5 billion. That's in comparison to outflow of $24.2 billion in the year-ago period, according to Lipper number crunchers.

Investors are inching back into US stocks for a couple broad reasons, say strategists.

First and foremost, there's nothing like a virtually uninterrupted surge to the right-hand corner of the stock chart to generate some interest from retail investors: the S&P 500 has rocketed up 76.5% since the March 9, 2009 closing low of 676.53 through Friday's close of 1194.37.

As we write here in the midday on Monday, the SPDR S&P 500 ETF (SPY), which includes holdings such as Exxon (XOM), Microsoft (MSFT), Apple (AAPL), General Electric (GE), and Bank of America (BAC), is up 0.4%.

"There is nothing like an 80% rally to get retail investors to buy," says Miller Tabak's Peter Boockvar. "Unfortunately, it is after the 80% rally. That has been typical of the past: Retail investors are a lagging indicator."

But Boockvar doesn't foresee the latest stats from Lipper as indicating some sort of significant turning point, however. Investors, he thinks, will not stampede back into the stock market in big numbers.

"The retail money that will come in will pale in comparison to what we have seen in prior cycles," Boockvar tells us. "They have put a lot of money into fixed income, and while that will be hurt by rising interest rates, it isn't rushing into equities any time soon."

The strategist adds, "A second bear market within 10 years has probably wiped out a generation of interest in the stock market."

In fact, Boockvar tells us that he uses signs of any kind of renewed interest on the part of retail investors as a sort of contrarian indicator.

Investors are always fighting the last war," he says. "Or, I should say, celebrating the last party. And it is always at the end of the party. The party might go on for a few more hours, but they're always late to it."

Not every strategist agrees, we should emphasize.

We also checked in this morning for a chat with Jim Swanson of MFS Investment Management to see what he made of the data. He acknowledges that retail investors are indeed well known to miss market bottoms and peaks.

"There is evidence that their timing is not exquisite in that regard," he says. "But I think their gradual reentrance into stocks is almost uniformly bullish. This now adds more buying power. In the short run, at least, I think this is positive."

How does valuation look?

In a word: fair, according to Swanson.

The S&P 500 is trading at 21 times its earnings over the past 12 months and 15.3 times expected earnings. (The long-term average multiple, strategists note, is 15.9 times).

From his perch, Swanson doesn't see a market that looks out of whack, right now.

"There is no evidence that there is a bubble," he says. "But it is not dirt cheap, either."

Of course, beyond the incredible surge in the stock market, investors are also feeling better about recent data indicating a US economy on the mend.

"After what we have been through, people want to take comfort in the idea that things are getting better," Boockvar says. "It's a lot better to wake up in the morning knowing that the economy is recovering rather than the opposite."

As we highlighted in our recent article, Rising Oil Means More Pain at the Pump, March payrolls climbed by 162,000; pending home sales rose 8.2% month-over-month compared with consensus forecast of no change; and economic activity in the non-manufacturing sector grew in March for the third consecutive month.

Whether investors should be putting more money to work in the stock market right now, says Sam Stovall, chief investment strategist at S&P Equity Research, really hinges on a question only they can answer.

Specifically, do they have the cash, courage, and time horizon to suffer a correction of as much as 10% to 15% soon after adding to their equity positions?

Stovall does think the market will be higher 12 months from now. (S&P's Investment Policy Committee just raised its 12-month target for the S&P 500 to 1270). But, the strategist says, he sees a sell-off coming.

Historically, post-WWII, we have had an average of one decline in the second year of a bull market and the average is 10%, Stovall tells Minyanville.
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