Breakout

Main Street Is Much Smarter Than Wall Street Thinks

Jeff Macke
Breakout

No place on earth is more devoted to visible conformity and avowed contrariansim than Wall Street. There are hundreds of books on contrarian investing and almost none on conformity, or the simple process of trying to sell things to the greater fool. The most effective strategy for mass marketing a financial product is to claim it's a secret.

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Nothing scares institutional investors more than outsiders ("Mom and pop" or "individual investors") crashing the party. According the Lipper, investors have put $76 billion into stocks funds this year, reversing a $450 billion downdraft from 2006 through the end of last year. "Individual Investors Are Returning to Stocks," according to this morning's Wall Street Journal, almost needlessly adding "which could be bad."

In the attached clip David Lutz of Stifel says investors are starting to pay more attention to stocks again but with a more skeptical and better informed approach than in past years. Investors may be plowing money back into stocks but it's more a function of practicality than social mania. The S&P500 (^GSPC) has a market capitalization of more than $1.6 trillion. Thanks to the FOMC bonds have essentially no yield. Those things being the case, it's odd to think a reversal after half a decade of equity outflows represents a national mania.

Related: 3 Reasons to Re-Think Bailing On Stocks at All-Time Highs: Belski

The question regarding capital flows isn't whether or not unsophisticated investors are getting into stocks but whether or not more cash is coming in behind it. Lutz says there's still money in Europe and money markets that can be rotated into U.S. markets and by his accounting there are more than $2.7 trillion in money market funds. As that money drifts towards equities and mutual funds its lifting stocks higher.

Mom and pop get the abuse, but this year they're also making the money. "95% of (hedge funds) are lagging the S&P 500 right now," notes Lutz, "Their longs are working but unfortunately their shorts are working better than their longs."

Related: Fed Stimulus Boosts Fortunes of Wall Street, Leaves Main Street Behind: Baker

Investors looking for a contrarian strategy should ignore what the hedge funds say about betting against the crowd and watch how they invest. Once professional investors stop whining and start buying stocks it'll probably be a nice time for Main Street to take profits.

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