NCPA - National Center for Policy Analysis

Stock Rally Might Be Best Economic Stimulus

September 30, 2010

An old-fashioned stock rally with legs that makes investors feel richer and CEOs more confident may be the best way to boost the sluggish economy, says former Federal Reserve Chairman Alan Greenspan.  In a recent speech, Greenspan said the "most effective" stimulus is rising stock prices -- not more government spending.

Many Wall Street experts agree.  But there's a Catch-22:  Stocks are unlikely to keep rising if individual investors keep yanking cash out of stock funds, says USA Today.

Right now, there is a disconnect between what Main Street investors say about the stock market and what they are actually doing with their money.

  • Thanks to the best September performance for stocks since 1954 -- Friday's big rally left the Standard & Poor's 500 up 9.5 percent since August.
  • The percentage of individual investors who say they are "bullish" has risen to as high as 50 percent this month, up sharply from a two-year low of less than 21 percent in late August, a poll by the American Association of Individual Investors found.

But that rising optimism hasn't translated into buying.

  • Retail investors have pulled cash out of stock funds all three weeks in September, extending a streak of net outflows to 20 weeks, the Investment Company Institute says.
  • In the past three weeks, stock funds have had net outflows of $13.8 billion.

Can the market keep going up without individual investors?  No, says Chris Johnson, chief strategist at Johnson Research Group.  "At some point, the retail investor has to get involved if the market is truly to enter a bull market" and break out of the recent trading range.

Of course, money tends to follow performance.  So if stocks keep rising, it could lead to a self-fulfilling prophecy, Johnson adds.

Source: Adam Shell, "Stock Rally Might Be Best Economic Stimulus," USA Today, September 28, 2010.

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