Investors Keep Pulling Money Out of Stocks

Tell me what stocks did last week... and I'll tell you how sentiment will look this week.

It's not always that simple. But this idea is more correct than most would like to admit.

The market's massive turnaround from 2022 has made both individual and professional investors more excited about stocks. But that sentiment reversal doesn't mean folks are buying stocks hand over fist.

In fact, funds only started flowing into stocks in June of this year... And that didn't last. Funds have flowed out of stocks ever since. Meanwhile, fund flows into bonds continue to soar.

Put it all together, and you start to realize investors might not be as bullish as they let on. And that means the stock market rally still has room to run.

Let me explain...

There are two ways to measure market sentiment. You can survey folks on how they feel... Or you can see what they're really doing with their money.

Surveys are better than having no indicator at all. But humans have a bad habit of saying one thing and doing another. So real-money indicators are always the better choice.

One of these indicators comes from data collected by the Investment Company Institute ("ICI"). The ICI is a trade group that collects data on mutual funds and exchange-traded funds ("ETFs").

One metric it tracks is the net fund flows of mutual funds and ETFs. The ICI can measure the money flowing in and out of both stocks and bonds through these investment vehicles.

U.S. stock fund flows turned negative in mid-2022. And they've mostly been negative ever since. In fact, one of the biggest outflows in recent years happened in May.

June was the only exception. We saw $7.5 billion flow into stocks that month... But that uptrend didn't continue. Take a look...

With the bear market in full force last year, investors started pulling money out of stocks. Sentiment has partly turned around since then... But folks still aren't pouring money into the stock market.

In July, investors withdrew $1 billion from stocks. And they've yanked out more than $16 billion in the first three weeks of this month.

Clearly, investors aren't going all in on stocks just yet... probably because they're still buying bonds like crazy. Below is the same chart – but for bonds. Check it out...

Investors spent nearly all of last year pulling money out of bond funds. But 2023 has been a different story. Everyone realized how much they could earn in fixed-income investments. So they started piling into bonds.

We've seen positive fund flows into bonds every month in 2023. Folks have pushed nearly $174 billion into these funds this year.

Between both charts, we see a clear trend. Folks might say they're getting bullish on stocks... But they sure aren't acting like it. Instead of pouring money into the stock market, they're still piling into safe bonds.

This won't last forever, of course. Once folks start putting their money where their mouths are, we'll see a flood of money into stocks, and prices will likely soar to new heights.

This is a setup waiting to unwind. And that inevitable switch is a big reason to stay bullish right now.

Good investing,

Brett Eversole

Further Reading

"Anyone who moved to safety at the beginning of the year has paid the price," Brett writes. Folks jumped at the opportunity to earn safe yields in bonds in 2023. That move makes sense if you're worried about a crash – but choosing bonds over stocks has been a mistake this year... Read more here.

"Nearly $5.57 trillion is sitting on the sidelines right now," Briton Hill says. Investors are still jumpy. They're pulling money out of stocks at a rapid pace. The problem is, the biggest stock market gains tend to happen during a recovery – which is exactly what we've seen this year... Learn more here.