MC, that would be an interesting study - to correlate mutual fund inflows to market returns. The problem though, like William H. said, is that the money doesn't actually stay in the market. Except for new issues of stock, any money coming in goes back out the other side. Unless new shares are being added to the supply of all shares, someone selling to the new money (or selling to those who sold to the new money, but rolled over to another stock - you know what I mean) has to be going to cash or some other non-equity holding. Probably, the more times the money is rolled over into other stocks rather than being pulled out of the market, the bigger the multiplier effect on the overall market value of all equities, but that's just a guess.
The argument that I have been hearing since 1987 is that money has been going into the market much faster than the supply of shares has grown. A some times, the supply of shares was actually shrinking I think due to cash acquisitions (incl LBOs) and stock buyback programs. That demand/supply imbalance is still one of the primary arguments of bulls and they point mainly to demographics as proof that it will continue for some time to come. I don't agree that this means the bull market has to continue though.
Right now, most of the American public thinks that the stock market can't go down and that it is the only sensible place to put your money, regardless of how high it goes. They have lots of reasons to think this. In the very long run, as long as we are a viable society anyway, the trend is up. Lately, that is over the last 3-4 years, the dips have been very small and short lived because everyone has been conditioned to buy the dips - since we have recovered from every one so far, we will recover from the next one too, so everyone rushes in to buy a little earlier each dip. No one stops to ask why it's down or whether it might be too high - all that matters is that it is lower than it was yesterday and it will always recover and go higher, so every dip is a buying opportunity.
I read a commentary today that suggested that the money flows that everyone watches could continue to show lots of money "flowing into" the market, but the market could be flat or down anyway. Sounds illogical at first, but if you consider what William said about the money not staying in the market anyway, it makes sense. The commentator mentioned this condition because he would see that as a strong indication of the top of the mania.
Anyway, new money or not, this mania will end - badly.
Good luck,
Bob |
