My recent post There is No Alternative (TINA) pointed out that the average exposure to equities of all investors is at a record high of 52%. Another way of looking at this apparent level of optimism is to examine flows into equity mutual funds and exchange traded funds. The following chart depicts this data for the past three years.
First, there were net withdrawals from equities for 2019 and 2020 amounting to just under $600 billion in total. (The blue bars) Beginning in February of 2021, sentiment reversed dramatically with net additions to equity funds since then of $335 billion. Net inflows of $74 billion in March of 2021 represented an all-time record.
The orange line represents the S&P 500 and you will note the classic perverse pattern of “Buy high, sell low.” Following the brief market decline in March of 2020 associated with the pandemic lockdown, investors sold stocks for seven straight months only to return to the equity market in early 2021 when it had already risen more than 40%. The net inflow of $335 billion in 2021 has occurred despite the fact that the index has risen more than 100% from its March 2020 lows.
There are many reasons to be bullish on stocks including strong corporate earnings, poor prospective returns on bonds, accommodative monetary and fiscal policy, and a huge amount of liquidity throughout the world. On the other hand, Warren Buffett’s colleague Charlie Munger recently said that “markets are even crazier right now than during the dotcom bubble.” This is a tough call but I will stick for the moment with my TINA post conclusion which was to continue to enjoy the ride but with a wary eye toward a financial mania.