NCPA - National Center for Policy Analysis

Study Finds Large Market Withdrawals Mean Stocks Have Bottomed

September 17, 2002

This past July, individual investors withdrew $53.4 billion from stock funds -- the second-biggest cash-out as a percentage of assets, and the largest even in sheer dollar volume. The retreat may signal that investors have given up in the face of constant losses, and that things are going to get worse.

But many professional analysts view such a move as a contrary indicator -- a signal that markets have touched bottom. One such analyst is Tobias M. Levkovich, chief strategist for Salomon Smith Barney. He took a look at the biggest mutual-fund cash-outs over the past 30 years, as a percentage of assets redeemed by investors -- and compared them with what happened next.

  • The largest sell-off occurred in October 1987 -- and it was followed by a gain of almost 11 percent in the value of the Standard & Poor's 500 stock index over the next 12 months.
  • Those who put money into the broader market in August or November of 1988 -- record dates for mutual-fund outflows -- enjoyed gains of 34.4 percent and 26.4 over the next year, respectively.
  • Investors do no better at calling the peak of the market, Levkovich says.
  • For example, new investments in stock mutual-fund shares in February and March of 2000 -- just preceding the market peak of March 10 -- were five times the monthly average of the inflows for the previous two years.

Moreover, the inflows continued even as the market began to slide.

Source: Margaret Popper, "Economic Trends: Investors Are on the Run," Business Week, September 23, 2002.


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