Mutual Fund inflows are somewhere around 200 billion a year, thats a little over 1.5% increase in market value.
MC, isn't there kind of a multiplier effect on that $200 mil? That money comes in and bids up stocks that those funds are buying. The sellers of those shares turn around and buy other stocks, bidding them up as well. Since all shares are revalued upward based on the last transaction, the $200 mil of new money could cause the overall market to rise by much more than $200 mil. More simply, if Yahoo, at $100, is worth $5 billion in total (just using round numbers folks) and some genius fund manager decides to put $10 mil of new money into it, driving the price up by $1, the market value of Yahoo rises by $50 mil or five times the amount of new money.
Of course, the shareholders who held rather than selling to this fund manager only feel richer. The ones who actually sold really are richer.
The flip side, of course, is that if money stops entering the market or actually leaves the market, the game is up. Consider that mutual funds are holding record low levels of cash, so if investors start to get nervous and pull a few bucks out, they would have to start selling to meet redemptions. In addition, there's a lot more to worry about than whether small investors are putting money into mutual funds. Individuals investors, other types of institutions that may take the prudent man rule more seriously, or foreign investors could all sell stocks at any time, regardless of whether new money is going into funds and fund managers keep immediately deploying it.
That marginal demand could easily become supply and suddenly wealth starts evaporating a whole lot faster than people are actually taking money out. People get the next statement on their 401-k plans and see it shrink, then see what happens. It feeds on itself just like on the way up. And remember, out of the whole economy, $200 bil is a relatively small sum and there are plenty of other places it can go besides the stock market. Just a very small marginal change and the supply/demand balance shifts.
Otherwise, some day it is just going to stop going up because all the money is already in it.
Precisely.
Bob |
