$33.12 Billion Withdrawn From Domestic Stock Market Mutual Funds Through July

According to the Investment Company Institute (via the New York Times, links to both below), investors withdraw a "staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year".

Investors are choosing to eschew equities in favor of "investments they deem safer", such as bonds.

According to Brian K. Reid of the Investment Company Institute, such activity after the end of a recession is very unusual. Reid claims that by this time in past economic cycles, "$10 to $20 billion would normally be flowing into domestic equity funds".

I think that there are a number of factors at work here, including:

1. The average American is just not buying into the idea of an "economic recovery" taking hold. Sure, corporate earnings are improving, but are the fortunes of the average American improving as well? The national unemployment rate is currently sitting at 9.5% and expected to cross 10% in late 2010 / early 2011. It's pretty hard to Mr. and Mrs. Average to get excited about the future prospects for the country when they can't find work. You invest in equities when you are optimistic about the economy - many people are just not optimistic, especially with many indicators flashing that the country may be about to enter into a "double dip recession".

2. Many Americans just don't trust equities anymore. Ten years ago the mantra was - "put your money into the US stock market and you will become rich over time." The past 2-3 years have shattered the perception that the stock market is a sure path to future riches. After all, the S&P 500, DJIA and NASDAQ are ALL down from August 29th, 2000. If you invested in the markets in the summer of 2000, then you are likely down over the past 10 years, and that doesn't even take into account inflation.

3. Many Americans don't trust Wall Street anymore. Sure, there was always a healthy distrust for Wall Street, but people REALLY don't trust Wall Street after the events of the past 3 years. I'm not surprised that many people are choosing to avoid equities and keep their money in safer investment vehicles (such as government bonds, cash, gold, etc).

4. Many Americans simply don't have the appetite for risk. Many baby boomers, who are set to retire in just a few years, have seen their net worths slashed since the beginning of the "Great Recession". They are in capital preservation mode - most have no desire to see their net worths further decline, so they are choosing to stay in safer alternatives to equities.

In addition, many Americans are currently in survival mode right now and simply don't have the extra funds to invest in equities. Many Americans are choosing to exit equities in order to raise cash, and many others are choosing to make "hardship withdrawals" from their 401(k)s for the same reason. Many families have lost one or both of their incomes, which means that they are looking for ways to raise cash until employment can be found.

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The situation is pretty dire right now in the United States, no matter how some people try to spin it. I'm not surprised at all at the pace of withdrawals from domestic stock market mutual funds, and I wouldn't be at all surprised to see the trend continue into 2011.

Source: New York Times - In Striking Shift, Small Investors Flee Stock Market

Source: Investment Company Institute

Filed under: General Market News