This Stock Market Indicator Is Flashing Green Income Investors 2019-12-16 02:34:39 Equities shot the lights out in 2019. And according to one stock market indicator, investors have good reason to expect more gains in 2020. Stock Market https://www.incomeinvestors.com/wp-content/uploads/2019/12/business-team-discussion-on-meeting-to-planning-investment-trading-project-and-strategy-to-investor_t20_QzAXky-150x150.jpg

This Stock Market Indicator Is Flashing Green

The Last Time This Happened, the Stock Market Soared 25%

U.S. equities are on track for one of their best performances in six years. And according to one stock market indicator, investors have good reason to expect more gains in 2020.

Data provider Refinitiv Lipper recently reported that retail investors have pulled $135.5 billion from U.S. equities since the start of 2019. (Source: “Investors Bail on Stock Market Rally, Fleeing Funds at Record Pace,” The Wall Street Journal, December 8, 2019.)

The outflow represents the largest withdrawal on record since the company began keeping records in 1992.

Most of that money has shifted into safe havens like bonds and money-market funds. Year-to-date, retail investors have poured $277.3 billion into U.S. bond funds. Over that same period, $482.8 billion has flown into money-market funds.

So what does this mean? A dour public usually means outsized returns over the following year.

Listen, the stock market has a nasty habit of doing the opposite of what most people expect. When the public gets bullish, share prices usually tank. And when the public gets bearish, equities shoot the lights out.

Right now, the average Joe Sixpack is worried. Stocks have soared in recent years, and most people believe we’re overdue for some sort of a market correction.

Moreover, the media continues to print negative headlines: trade war fears, a potential recession, lower corporate profits. All of which gives people good reason to sit on the sidelines.

But historically, equities have performed well when retail investors begin withdrawing funds.

I have highlighted this phenomenon in the table below. It shows every year the public has pulled money out of stocks and the S&P 500’s performance over the following 12 months.

Year

S&P 500 One-Year Return

2008

26.8%

2011

16.0%

2012

32.4%

2016

21.8%

2018

25.2%

(Source: Yahoo! Finance, last accessed December 13, 2019.)

Admittedly, the table above represents a small sample size. It would be wise to use a larger data set before making any sweeping conclusions.

But it’s hard to miss the obvious conclusion here. Equities tend to do better when the public is nervous. It’s almost a universal law, like gravity or the conservation of mass.

And we’re not talking about modest gains, either. On average, the S&P 500 delivered a 24.4% one-year return following any calendar period when retail investors pulled their funds. By comparison, the index has historically averaged returns of around eight percent per year over the last century.

Now to be clear, I don’t recommend trying to time the market. You can slice and dice the data to say just about anything. For that reason, I advocate a more “buy-and-hold” strategy.

But the report from Refinitiv makes one thing clear: the Joe Average investor hates the stock market right now. And historically, that has meant more gains down the road.

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