With the Dow Jones Industrial Average moving past 13,000 toward pre-financial-crisis highs, the conventional wisdom is that the stock markets expect a robust economy soon — just what President Obama needs to guarantee his re-election this fall.
Not so fast.
Yes, the economy may be improving after its anemic growth in 2011, which is better than a double-dip recession for a president seeking a second term. Stock prices — traditionally a good indicator of future growth — have been rising.
But much stock market “strength” appears to have less to do with a firm investor consensus that the economy is about to take off and more to do with technicalities.
For starters, returns on bonds are rock bottom, thanks to the Federal Reserve’s policy of keeping interest rates near zero. That forces many professional traders to bid up stocks.
Plus, while the pros these days cruise in and out of the markets at lightning speed and with no purpose other than to make a quick buck, the average investors who’ve traditionally used the markets to save and invest for retirement seem to have come to a far different conclusion about the markets’ prospects.
Main Street is ignoring the market’s rapid rise, no matter how much money the pros are making. Rather than investing in the much-hyped Obama recovery, small investors are giving it a big, fat thumbs down.
Of course, there’s a host of reasons why different investors take different approaches and no single perfect indicator of small-investor sentiment. But we can look at how much money is flowing into or out of mutual funds that invest in stocks of US companies.
Mutual funds have always appealed to the masses; they’re Main Street’s way of playing the market and saving for retirement. You’re basically giving your money to a professional to invest in sectors with stable long-term returns or in (say) a basket of the biggest companies in Corporate America, like the Standard & Poor’s 500.
What’s happening with stock mutual funds says Main Street thinks that the economy stinks and that it ain’t getting better.
The exodus from mutual funds that invest in US stocks began in 2006 and 2007, as the financial crisis began to emerge; investors yanked $65 billion from stock funds in 2007 and $148 billion in 2008.
During Obama’s first year in office — amid his promises of low unemployment from a huge stimulus package, and with the Fed printing money — the outflow slowed greatly. Main Street investors apparently bought the hype as they pulled just $28.1 billion from US stock funds in 2009.
But as the president failed to deliver on his economic promises, including his recovery summer of 2010, investors started giving up again. In 2010, they pulled $95 billion out of domestic stock funds, and 2011, even as the economy began a feeble recovery, they yanked even more — $135 billion.
The lack of confidence continues now. The Investment Company Institute estimates that during the first three months of this year more than $16 billion has been yanked from stock mutual funds that invest in US companies.
Veteran New York Stock Exchange floor trader Doreen Mogavero attributes this to Main Street’s “fear factor” about the economy and its doubts about Obama’s ability to produce much better results anytime soon.
“I think most people are taking money out of these funds because they either need the money to live — because they’re out of work or underemployed — or they’re supporting their kids, who are out of college and not getting jobs,” Mogavero said. “There is also a fear factor about the economy that is causing them to keep money in the bank and out of the markets.”
Now, Main Street America doesn’t always have a good read on the economy and the markets; the pros are quicker to return when things are getting better — and quicker to get out when things are turning down. But the salient point here is that the average investor isn’t betting on Obama.
Keep in mind, mutual funds are hardly the investment vehicles of the Fat Cat class. Even many working-class Americans have been invested in the stock market through these funds, if only through 401(k) retirement plans.
If the average investor doesn’t think Obama is producing economic recovery, then the president may be in ever bigger trouble come November than his low approval ratings suggest.
Charles Gasparino is a Fox Business Network senior correspondent.