In normal times, the beginning of the year is good for stocks. It's bonus season and it's New Year's resolution season, and mutual fund managers see a welcome influx of cash. That money gets put into the market, helping send it higher. There is a reason that January is typically the best month of the year.

These are not normal times, however. The market has been damaged badly, and that will make investors more cautious about committing new money to equity funds. January flows were anemic in 1995, the year after the market struggled with a series of rate hikes; in 1998, in the wake of the Asian currency crisis; and in 1999, when memories of the Russian debt debacle were still fresh. It's doubtful that 2001 will be any different.

"Market performance is more important than the seasonal factor," says Carl Wittnebert, director of research at fund flow tracker

Liquidity Trim Tabs

. "Unless performance improves, I think the flows are going to be very lackluster."

The dampening effect poor market performance has on flows is already in evidence. In November, only $8.8 billion came into stock funds, according to the

Investment Company Institute

-- the worst month for flows since 1999.

December may end up being worse. According to

AMG Data

(which, like Trim Tabs, seeks to get an early read on what the eventual

Investment Company Institute

report will be) the month had seen outflows a bit north of $30 billion through this past Wednesday. Particularly worrisome were outflows of $19.1 billion for the week ended Dec. 20 -- the worst week on record.

"Seasonally, one would expect to start seeing positive inflows at the end of December," says

J.P. Morgan

equity strategist Doug Cliggott. "This was a real shot across the bow that we're not dealing with business as usual here."

A not-so-great first quarter for fund flows doesn't augur a bad market, however. The market put on pretty good performances in 1995, 1998 and 1999, after all. The 1998 experience, in particular, is worth thinking about in the current context. Flows were weak and the year started on a weak note. Because there was a lot of worry about possible aftershocks from the trouble in Asia (which did, in fact, come, but not 'til much later), fund managers had pretty high levels of cash on hand.

In late January, the market began to turn higher. Investors who had held off on fund contributions opened their wallets. Cash flooded mutual funds in February, and because their cash levels were so high, fund managers had to throw that money right into the market. Naturally, this made the market go higher and, in keeping with the chicken-and-egg relationship of flows and market performance, this attracted more fund flows. New money continued to barrage funds and by the end of April the

S&P 500

had already gained 15% on the year.

It seems we could be heading into a similar situation in 2001. The market is spooked, flows look to be meager, and according to the latest ICI data, cash levels are at their highest in three years. If the market turns higher in January, and the 401(k) money again rolls in, fund managers could again tossing money at stocks.

Could well happen again, but there's just one problem: figuring out where the cash is going to come from.

"The big difference between then and now," says J.P. Morgan's Cliggott, "is then American households had some money they could chase performance with. Now they don't. The desire might be there, but the fuel is gone."

In January of 1998, 4.6% of Americans' disposable income was going into savings. But the stock market's phenomenal performance in that year and, even more so, in 1999, led many investors to view double-digit returns in the stock market as a gimme -- recall that in the fall of 1999 a couple of fellows put out a book called

DOW 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market

and people actually bought the damn thing. As the market continued to shoot higher, more and more investors began treating the stock market as a proxy as a savings account.

This year, for the first time since the Great Depression, the U.S. savings rate has slipped into negative territory. Essentially, the U.S. is living hand to mouth, and that gives us very little wiggle room. When were hit with non-negotiable price increases (like higher home-heating costs) our outlays for discretionary items go down. That means we buy fewer cars (as the automakers can attest), buy fewer Christmas presents (as any retailer could tell you) and put less money into the market. Or even need to take money out of the market.

"Those cash balances the mutual funds built up? They might need them," says Cliggott. "We're probably talking about the third or fourth quarter before you have the retail investor back in the market." That in itself does not mean stocks will continue to struggle in the first half of the year. If fund flows were the only factor in the market, 2000, which saw the largest inflows ever, would have been a great year for stocks. Obviously, that hasn't been the case.

But even if the market does begin to improve here, many investors no longer have any new money to put to work. The environment for a sharp, liquidity-driven recovery in the beginning of 2001 just isn't there.