Here comes the "dumb" money of retail investors steamrolling into stocks and out of bonds and cash. I can just hear the traders at Goldman Sachs telling their clients it's time to dump stocks and leave investors once again holding the bag.
As the Dow Jones Industrial Average clears 14,000 in January and the S&P 500 is north of 1,500, both for the first time since 2007, it is predictable that the retail investor is just joining the rally at the top. Retail investors in January plowed a record $30 billion into stocks and exchange traded stock funds (ETFs). This is the fastest inflow since 2000. But what do the numbers really show?
The retail investor-derided as the "dumb" money on Wall Street is always late to the game. In 2000, after the Dow soared above 10,000 and the NASDAQ topped 5,000, we saw the biggest crash in the last 30 years, wiping out investors' retirement and savings accounts as tech and dot-com stocks pushed by their financial advisors cratered. It took investors almost a decade to make up the losses.
On October 9, 2007, the Dow had a record close of 14,164, a time when the retail investors went "all in" again on stocks. Once they did, the market quickly crashed during the 2008 financial crisis, with the Dow falling to 6,500 by March of 2009, at which time many sold out, again suffering huge losses. As Yogi Berra once said, it's like déjà vu all over again. Wall Street firms push stocks to higher and higher levels, bringing in retail investors. They then sell out for their big "smart money" institutional and hedge fund clients, leaving the little guy holding the bag.
Indeed, Mom and Pop investors need to be careful of the hype of the supposed great rotation from bonds to stocks. "A cynic might wonder if the whole notion of a Great Rotation has been concocted to assist those other investors in unloading their equities at higher prices," wrote Mark Hulbert last week for MarketWatch.
Institutional investors, and the banks that do their bidding, may very well be promoting the idea that now is the time for retail investors to buy stocks so institutions can dump their shares, according to Hulbert. He writes, "John Hussman, chief investment strategist for Hussman funds, is one such cynic. He suspects that one motive for the notion is 'a desire to distribute overvalued institutional holdings onto the unwashed muppets'."
Hulbert also notes that the standards used to determine whether individual investors are over-invested in bonds and under invested in stocks are unclear at the moment, and it was completely rational for such investors to avoid stocks in recent years. Ask your broker why now is the time to buy into stocks as opposed to any time over the last four years? And then watch as he or she fumbles for an answer and then declares it 'feels' like the time.
We are already hearing the drum beat of the "tippy top" of the market, just as the little guy has gotten in again. To retail investors, we implore that they tread cautiously and watch out for the door and don't let it hit them on the way out. The little guys will be rolled over by the Goldman Sachs money rushing out of stocks before the next crash.