Monday, December 28, 2009, 11:45PM ET - U.S. Markets Closed.

Who's the 'Smart Money' Now? Americans Give Up on Stocks, Wall St. Says 'Buy'

Posted Dec 22, 2008 10:06am EST by Aaron Task in Investing

Wall Street (a.k.a. the "smart money") is taking solace in news individual investors (a.k.a. the "dumb money") took a record $72 billion out of stock mutual funds in October, according to the Investment Company Institute; other fund flow trackers show similar trends in November.

Yes, while retail investors are giving up on stocks, according to the WSJ, Wall Street strategists forecast an 18% rise for the S&P 500 in 2009, according to Barron's.

Although mutual fund investors have historically been terrible market timers, there are several reasons to be cautious about betting against them:

  • The "smart money" hasn't been so smart lately; heading into 2008, Wall Street strategists (including many of the same cited in Barron's this weekend) were forecasting the S&P would be at 1,640 right now. Then came all the false "bottom" calls throughout 2008.
  • Stocks tanked this year and still haven't "bottomed" even though mutual fund investors have been pulling money out of U.S. equity funds since 2006, at a rate of about $40 billion annually, the WSJ reports.
  • Either directly or indirectly, individual investors own about 50% of U.S. stocks; if they keep selling, it's going to be a major drag on indexes for the foreseeable future.
  • Long periods of overvaluation for stocks — as we've just gone through — are typically followed by long periods of undervaluation, meaning today's "attractive" valuations could get cheaper still, or just remain stagnant for years.

Having said all that, history suggests true long-term investors would be mistaken to totally give up on the stock market now.

145 Comments

Ken
Ken - Monday December 22, 2008 10:46AM EST

Actually stocks go up when investors "think" businesses will earn more money in the future. They go down when people "think" that businesses will earn less money in the future or there is uncertainty about their earnings.

Arthur
Arthur - Monday December 22, 2008 10:47AM EST

If the retail broker knew so much, he/she would not be talking to you,

Ken
Ken - Monday December 22, 2008 10:48AM EST

Actually stocks go up when investors "think" businesses will earn more money in the future. They go down when people "think" that businesses will earn less money in the future or there is uncertainty about their earnings.

JC
JC - Monday December 22, 2008 10:49AM EST

What's a "true long term"? 30 yrs? We have gotten used to instant wealth creation machines in the last decade, no way anyone is going to bet on the "true long term"... Many can't afford it anyway. S&P will hit 600 in 2009. We will be talking DOW 10K in 2013.

dano
dano - Monday December 22, 2008 10:51AM EST

What would you expect the Wall Streeters to say? They were saying buy and will continue to say buy all the way through this downtrend. Don't you believe they may have a bias just as much as how an autoworker would be for the auto loan bailout? We need to follow what people who don't stand to gain from this say about the markets or industries, not those within the industry. I'm not a part of the industry and am investing only to make money. I'd like for all Wall Street analysts to have in writing where they state when they believe we've bottomed and how soon after the recent lows they stated that. That way we can see the record for each. I'll go head to head with them as well. We still haven't hit a major low yet and seem to be marking time and waiting for something before we plunge again to new lows. The DJIA can rally all the way up to 9924 and this would still mean the downtrend and major low have not occurred. I said no major low back when we had recent lows in October and November and it was within 3 business days of those recent lows that I stated that. I can only tell whether a low is a major low a few business days after the fact, so I'm not predicting anything.

Yahoo! Finance User
Yahoo! Finance User - Monday December 22, 2008 10:52AM EST

Trust your own judgement--not the greedy street. They will try to swindle you out of what is left in your bank account. CDs are the answer--yes, even at 1%.

Yahoo! Finance User
Yahoo! Finance User - Monday December 22, 2008 10:53AM EST

some nut job talked me into buying ldk at 73 bux, now my mom kicked me out.

Whit Chambers
Whit Chambers - Monday December 22, 2008 10:55AM EST

In the mid 1980 interest rates for a 30 year fixed mortgage was about 10 percent. When Regan infused capital and interest rates were cut, the market took off. Clinton was a beneficiary of lots of capital, low interest rates, and new technology that we could sell around the world. The stock market took off so much there was a technology bubble. Now rates are so low the only thing propping up the markets are Fed infusions. Even though the market is down 35 percent, the upside does not appear to outweigh the downside.

thomasromancer
thomasromancer - Monday December 22, 2008 10:56AM EST

Who wants to invest their money into a corrupt and highly government propped up stock market? Right now, Disneyland; the Magic Kingdom has more reality than our financial system. Until America and American's can learn to live within reasonable financial means and integrity returns to our country and businesses, investing in the markets is probably more risky than gambling at the craps table. At least you know the house in the casino's actually wants to take your money and what your real odds are.

Kilty
Kilty - Monday December 22, 2008 10:58AM EST

I'll load up on stocks when Henry and Aaron strap on dresses and jump through that glass window!

Yahoo! Finance User
Yahoo! Finance User - Monday December 22, 2008 10:59AM EST

companies have had it to easy,putting junk out there and selling it,now they will have to change and put some quality products out there and train their help,and they all will, trust me,the stock market will get a whole better before long

Pete
Pete - Monday December 22, 2008 11:00AM EST

I hope the next SEC head outlaws "short selling" , some countries have already. The practice only makes the hedge funds and high rollers wealthier ( those that know what their doing ) and disrupt the markets. The middle class is more interested in building their 401 K and IRA funds but can't due to the "shorts" disrupting the markets. Also margin trading needs to change and require more cash up front .

jim
jim - Monday December 22, 2008 11:00AM EST

Buy farmland , gold and silver coins , bonds of companies that are in the food business , or utilities . Never buy buy funds run by Wall St , individual issues highly rated ....scale them out to 5-7 years max.

Yahoo! Finance User
Yahoo! Finance User - Monday December 22, 2008 11:00AM EST

January 16th 2010 - Judgment Day, the U.S. economy collapses. 50% plus unemployment and the dollar near worthless. Enjoy the remaining year boys and girls. Looking forward to seeing the movie "the day the earth stood still". Enjoy while you can, enjoy.

jim
jim - Monday December 22, 2008 11:01AM EST

Buy farmland , gold and silver coins , bonds of companies that are in the food business , or utilities . Never buy buy funds run by Wall St , individual issues highly rated ....scale them out to 5-7 years max.

Yahoo! Finance User
Yahoo! Finance User - Monday December 22, 2008 11:02AM EST

Return on the SP500 over the last 10yrs is negative. Better to pay off debt early, like a mortgage, than invest in the market. If everyone refuses to take on more debt and refuses to contribute to IRAs electing to pay off debt instead, what would happen?

john
john - Monday December 22, 2008 11:04AM EST

Wall street have ripped me off enough times, time to move on

Yahoo! Finance User
Yahoo! Finance User - Monday December 22, 2008 11:05AM EST

Smart money advisers only make the big bucks by selling "commisionable" products, of course they want individuals to stay in the market. The individual investor has not quit the market, the market quit on itself. If you have a long time horizon, there is no reason to get into this market now, if you have a short time, stay out for the duration. There are other places to make reasonable returns without paying the leeches who miss called the biggest crash of their lives. TIPS, I Bonds and laddered CDs will outperform most mutual funds, money markets and ETFs for the near term, at very low cost.

Stephen
Stephen - Monday December 22, 2008 11:05AM EST

Where are the customers' yachts?

Charlie
Charlie - Monday December 22, 2008 11:06AM EST

toyota---1st yearly loss since 1941--when will we wake up--opec is the problem and profitiers trying to ruin business---lets trade food and military protection for oil--how does that sound. and lets bring manufacturing jobs back home. at 43-44 dollars a barrel we are still paying too much at the pump.

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