Investors are still fleeing the market in droves...
That's in spite of the rally since stocks bottomed in October. In fact, the selling has only intensified in the past few weeks.
Recent numbers show that mom-and-pop investors are pulling massive amounts of savings out of equity mutual funds. A number of reasons come to mind... the first being the higher cost of everything.
But that doesn't mean stocks are doomed. The opposite is true.
We've seen three similar setups over the past three decades... And stocks were up 28% on average a year later.
Let's look at the numbers...
According to mutual-fund data provider Refinitiv, equity mutual funds have seen money headed out the door for 26 consecutive weeks.
That means investors have been exiting stocks since the middle of June... after the S&P 500 Index dropped more than 22%. And over that time frame, the funds withdrawn have totaled $254 billion.
Even crazier, folks have kept pulling money out of equity markets for 39 out of the last 40 weeks... bringing the total amount withdrawn to $333 billion.
Take a look at the following chart to see what I mean...
According to Refinitiv, withdrawals have only been this severe three other times since the data began...
The first time was in October 2008, around the financial crisis... The second was in December 2018, when stocks crashed due to a brewing trade war with China and a round of Federal Reserve rate hikes... And the third was in October 2020, ahead of the last presidential election.
The pace of withdrawals has accelerated late in the year, too. Roughly $16.5 billion in assets have fled equity investments every week for the last month. That's $65 billion just in the last four weeks.
To put this another way, 20% of the outflows over the last 40 weeks have happened since mid-November.
So, given this huge shift out of stocks, we wanted to go back and look at history. We went back to the three extremes we highlighted above – October 2008, December 2018, and October 2020 – to see how the S&P 500 fared in the following three, six, 12, and 24 months.
What we found was astounding...
As you can see, investing in equities when the herd is running for the exits tends to produce big gains. The 12-month average gain of 27.5% is much better than the lifetime average return of 9.1%. Even in the worst-case outcome, you're still faring better than average a year later.
Look – there's a lot of uncertainty in the investment world today. And there's no guarantee that stocks won't fall further. But successful investing is about putting the odds in your favor.
Based on what these metrics are telling us, the odds are in our favor now.
All of this extra cash is going to start burning a hole in investors' pockets. When they start looking for returns, they're inevitably going to put that money back into stocks. And that's why 2023 could see a major boom... one you won't want to miss.
C. Scott Garliss
"Inflation will slow down sooner than most believe... And that means the Fed's rate hikes will end sooner than most believe," Scott says. History shows that this is another setup for big gains in stocks... Read more here: A Two-Year Stock Boom Is About to Begin.
Investors are buying huge amounts of portfolio protection today. But with so much pessimism stacking up in the markets, the bears are likely to be proven wrong... Learn more here: One Reason the Stock Rally Can Continue.