November 1, 2012

Charles Biderman, Jeremy Siegel and Others on Today’s Market: Ground Floor or Precipice?

Biderman says investors are selling because they need the money; Siegel sees big rise

As the U.S. presidential election nears and the uncertainty of the fiscal cliff looms, opinion leaders are weighing in on what that means for stock market investing.

Charles BidermanIn a commentary posted Thursday on investment research firm TrimTabs’ blog, Charles Biderman (left), the firm’s CEO, offers a novel explanation for the rapid pace of outflows from U.S. equity mutual funds: investors simply need the money.

There are two types of such investors, Biderman says: The first are retired investors selling stocks regularly to pay bills. “There are about 90 million Americans in the retiring baby boom generation. Their children only number about half of that,” Biderman says, noting that pension funds that TrimTabs tracks have been selling stocks for three years.

Another group of sellers are unemployed investors in a down economy using whatever resources they have to get by.

Beyond those who have no choice, there are also those who are shifting their investment allocation to safer investments. Biderman says that while $10 billion per month have flowed out of stocks over the past two years, there has been a tidal wave of $20 billion in monthly flows into bonds and $40 billion flowing into bank accounts that pay depositors virtually nothing.

A third possible reason for the outflows may be investor fear of volatility. But Biderman dismisses this reason because investors typically follow stock-market performance, which has been quite positive in recent years. He argues that “stocks are staying up because the Fed is manipulating the stock market,” yet “the lousy economy is forcing people to sell stocks” anyway.

Whether or not to get in or out of this bizarre market that has been rising in a down economy is the subject of two recent commentaries, one by finance professors at the Wharton School of the University of Pennsylvania and the other by Brookings Institution economist George Perry.

Jeremy Siegel of the Wharton School (Photo: AP)Wharton professor Jeremy Siegel (left), of “Stocks for the Long Run” fame, notes the stock market’s value has doubled since March 2009, so that fearful investors are behaving normally in missing most of the party. In other words, the prevailing sense of bearishness is a bullish indicator for the market. “I can easily see stocks up another 20% to 30% from these levels in a year or two,” the Wharton article quotes Siegel as saying.

Siegel’s Wharton colleague Franklin Allen takes the opposite tack, defending the flight to “safe” bonds with low yields. “If you think the market is going to drop, then zero [return] is better than minus-20,” he is quoted as saying. Allen’s signal to get back in is a 30% fall in current stock prices.

Allen is not alone in this expectation. The most recent Chicago Booth/Kellogg School Financial Trust Index indicates that 47% of the public expects the stock market to plunge in the next 12 weeks, according to Wharton professor Olivia Mitchell. Mitchell’s own portfolio has outperformed the stock market since 1999, when she put all her investments in Treasury inflation-protected securities. Her difficulty today, however, is figuring out what to do now that TIPS are paying negative returns.

According to Brookings economist George Perry, fears of the stock investing because of the election, China’s economic slowdown, Europe’s decline and the looming fiscal cliff are overblown.

Citing Wharton’s Siegel, Perry points out that stocks’ long-term average return of 9.6% between 1888 and 2006 is likely to persist beyond the short-term distress of these factors that roil the markets. Markets perform well no matter which party occupies the White House, the slowdown in China only modestly impacts the U.S. economy, Europe’s crisis delivers shocks here and there but in the main is unfolding slowly.

Perry says the higher taxes and lower spending that the fiscal cliff might deliver is a bigger concern but not one that necessarily need impact long-term investors. His conclusion:

“Nothing now on the horizon suggests that money invested in stocks today will look like a bad investment five years from now…Now seems as good a time as any to be in the market for long-term investors, like those who are saving for college or for retirement.” He adds that timing the markets involves two correct decisions: when to get out and when to get back in.

Still, bearishness remains the prevailing sentiment in the U.S. today. The Wharton paper cites State Street’s head of U.S. portfolio management Chris Goolgasian, who meets regularly with brokers and advisors managing individual portfolios. With some 80 meetings under his belt since April, they all ask: How do I get my clients out of cash and bonds? “This is repeated at every meeting,” the State Street exec says.

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