The windows must have been looking quite bare last week, because fund managers are certainly in a decorating mood this week.
The major indices again advanced Tuesday as the money that went away in May was repositioned into stocks. Many mutual funds' fiscal years end Friday, and with a rally going on, managers can't send out their year-end letters and reports showing huge cash positions. The outcry would naturally be: "What are you waiting for?"
Well, fund managers were likely waiting for a correction, and even August's no-conviction, low-volume rally kept them on the sidelines. But September isn't showing signs of seasonal weakness, so the only decent thing to do is buy stocks, and buy the stocks that are doing well. That's not the old leadership, so fund managers are piling into the sectors that have bounced the most of late -- technology and homebuilders, for example.
The window-dressers had the wind at their backs in terms of the Tuesday's economic news as well. A strong consumer confidence report and better-than-expected manufacturing activity out of the Richmond Fed kept the market marching onward and upward.
Dow Jones Industrial Average
gained 0.81% to 11,669.39, a new high for the year and its second-highest close ever. The index is just 0.44% below the all-time high of 11,722 reached on Jan. 14, 2000. The
gained 0.75% to close at 1336.34, another new high for the year, while the
added 0.55% Tuesday to finish at 2261.34.
"A lot of what we are seeing is asset allocation," says Marc Pado, chief investment strategist at Cantor Fitzgerald. No doubt hedge funds also may be tempted to put on trades that are working. After the Amaranth blowup, investors surely will be more critical and more curious about where and how their money is being put to work.
Those mutual funds might have even more than their old cash piles to invest due to a resurgence of consumer sentiment and cash flows back into equity funds. Equity mutual funds reported a $3.784 billion inflow for the week ended last Wednesday, according to TrimTabs Investment Research. That is more than twice the prior week's $1.664 billion inflow.
The retail investor is more positive about the future and the economy, due in large part to lower energy prices. A drop in the cost of gasoline really does mean more new shoes for Johnny. The Conference Board's index of consumer confidence rebounded in September to a reading of 104.5 after a weak 100.2 reading in August. September's reading beat consensus expectations for 103.
Most telling is that consumers put their money where their mouths are too as retailers such as
have reported strong back-to-school numbers.
Mutual fund managers are still putting their money in larger-cap companies, revealing an underlying anxiety about declaring the soft landing a done deal, says Pado. "If investors were truly confident that the economy was in for a soft landing and the Fed is done with rates, they'd be buying small-cap," he says.
Big-cap stocks like
, performed well on the Nasdaq Tuesday, gaining 0.93% and 1.22%, respectively.
Leading the Dow were gains of over 2.5% in
Even the beleaguered energy and transportation sectors bounced. The Dow Jones Transportation Average finally joined the party, gaining 2.51%, and recent energy laggards like
both gained more than 2% apiece.
The Energy Select Sector SPDR
exchange-traded fund added 2.20% on the day.
The market also got a lift Tuesday from the Richmond Fed survey of manufacturing conditions, which was a welcome counterbalance to last week's weak Philadelphia Fed survey. Richmond's report revealed that manufacturing is robust in the central Atlantic region, as the index climbed to a reading of 9 in September from 3 in August.
Largely ignored by the markets, however, was news of inflation in the region. Manufacturers reported an increase in prices paid for inputs. Prices paid grew by 3.18%, from 1.88% in August, and expectations for price increases in six months increased to 3.7% from 3.28%.
Other measures of inflation expectations remain low, however, leaving the bond and stock markets unconcerned about inflation and the Federal Reserve content with its decision to pause. The Treasury market did take a breather from its heated rally Tuesday, however. The 10-year note lost 10/32 in price to yield 4.58%.
Once the windows are dressed, mutual fund managers are not likely to pull down the curtains and undo all their hard work, provided Tuesday's warnings from firms like
Advanced Medical Optics
aren't a harbinger of the upcoming earnings season.
If earnings substantiate the current levels in the stock market, the rally could well continue, and the dog pile into the stock market may have only just begun.
According to the Fed's flow of funds data for the second quarter of 2006, "global, individual, and domestic professional investors all continue to be hesitant towards buying U.S. equities, supporting our contrarian view that U.S. stock markets could offer returns in the mid-teens over the next 15 months," writes Tobias Levkovich, chief equities strategist at Citigroup.
"One may need to see the return of the individual investor to domestic equities (and away from internationally oriented funds) to provide a boost to share prices," he adds.
Strength at the end of the third quarter may show this hesitation is fading and that the May-September romance with raw cash has come to an end. Those new curtains sure make the windows look so much more put together.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
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