Fund flows into long term U.S. stock mutual funds have just started to perk up, according to long term mutual fund data from the Investment Company Institute, which covers over 95% of industry assets.
While an estimated $5 billion flowed out of stocks during the last four weeks, fund flows became positive, ie. net inflows, during the most recent weekly period of data, as shown below in red.
Meanwhile the bond investment frenzy has continued, with substantial inflows each week, shown above in gray.
Viewing ICI data on a longer time scale, from January to November 2009 $30 billion has flowed out of U.S. stocks and $349 billion has flowed into bonds.
If we even go back to the beginning of 2007, we find that a massive $229 billion has flowed out of U.S. domestic equity mutual funds since then... while $485 billion went into bond funds.
Thus in 2009, U.S. stock markets were able to rise despite a substantial fund flow headwind. It's hard to see how mere 'liquidity' could have driven the 2009 rally, as some skeptics claim. At least based on ICI data, U.S. equity fund flows were negative for the year.
Rather, the 2009 rally was probably more the result of sellers becoming unwilling to sell at lower price levels. While buying demand was diminishing, selling demand at lower price levels was probably drying up at an even faster rate. Thus prices had to rise in order to clear the market.
The combination of a rising market with negative fund flows is an encouraging sign for the future. Guess what could happen if fund flows significantly reverse and become a positive tailwind.
Read $229 Billion Fled Stocks Since 2007, Guess What Happens If It Comes Back
Disclosure: No positions