In the Investing Battle of Retail vs. the Pros, a Draw

The two sides are heading in different directions, producing a market stasis. But it won't last.
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For the past couple of years now, the rift between the outlook of the individual investor and the professional one has been a feature of the U.S. market landscape -- one where the individual investor has consistently been proven right. More than once, the professional investing community has taken a too-cautious stance, only to find itself chasing a rally shortly thereafter.

And so the pros have changed the way they do things, acting a little more like the retail investor, paying a little less attention to the rulebooks. The whole idea of working out what the "smart money" was doing has gotten turned on its head.

"It used to be people would be trying to figure what we're doing," says Sam Ginzburg, managing director of equity trading at

Gruntal

. "Now I'm trying to figure out what the masses are doing."

Yet recent fund-flow data suggest that professional money and retail money may be beating separate paths again. So far it has been an absolute barnburner of a year for equity fund inflows. If flows stick to their pace through Jan. 18, according to tracker

TrimTabs.com

, about $31 billion will have made it into equity fund coffers by month's end. (Last January, a little more than $17 billion came into stock funds, according to the

Investment Company Institute

.)

The profile of fund flows suggests that retail investors are continuing to put money to work in the areas that have generated the greatest returns. At the current clip, aggressive-growth funds would clear the month with $11 billion in new funds and international funds would garner $8.6 billion, with the rest going to vanilla growth-type funds. Just about nothing has been going to growth-and-income funds, and one can safely reckon that value funds (which neither TrimTabs.com nor ICI tracks separately) continue to bleed cash.

"It's very clear that the public is going wild over high-risk funds," says TrimTabs.com Director of Research Carl Wittnebert.

' The retail investor is making the pro look like a novice,' says Gruntal's Sam Ginzburg. 'The guys with the degrees and the suspenders haven't been doing so well.'

Yet interestingly, stock prices have not responded in the way one might think from these flows, with high-growth stocks ramping while other areas languish. In a choppy month for the market, the

S&P Barra Growth Index

and the

S&P Barra Value Index

are right around where they were when we packed the station wagon and put the 20th century in our rearview mirror. Retail faves, like the dot-coms, haven't made much headway, while things like autos and, God bless 'em, agricultural products are showing good action. The implication is that professional investors are taking the mutual fund money going into growth and putting it someplace else.

"The professional and the individual are going in opposite directions," says

J.P. Morgan

strategist Doug Cliggott, "and the result is pretty much a dead heat."

With bond yields moving higher, one can understand why some money managers may be cashing in some of their high-growth chips: The market they were schooled in says you're supposed to pare back on high-multiple stocks when the

Fed's

on a rate-hiking course and head for less volatile areas.

But the prospect of higher yields simply doesn't seem to worry individual investors as much. They see in high-growth stocks potential gains that bonds, even with their essentially risk-free returns, can't come close to matching. And so there's a kind of stasis in the market, with one group's action counteracting the other. But the stock market usually does not stay static for long.

"We know the mutual fund money starts to slow around mid-February," says Cliggott. "When that happens, will the professional investors still be reducing tech exposure and rotating back into more institutional stuff?" By his lights, yes -- but understand that Cliggott is of the school that thinks the

historical relationship between stocks and earnings and bond yields will reassert itself.

What may happen instead is what's been happening for a while -- retail ends up being right. After all, says Ginzburg, "The retail investor is making the pro look like a novice. The guys with the degrees and the suspenders haven't been doing so well."