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Q4 2019: Record Equity Outflows Singing a Tune Long-Term Investors Typically Love To Hear

Updated: Sep 27, 2022

Through November the stock market (as measured by the S&P 500 Index) was up 25%+ for the year. A reflection of a strong domestic economy, cheap money, and the most recent corporate tax cuts. To simplify, businesses are doing great and consumers are not doing too bad themselves. These positives seem to outweigh the less than stellar economies of our trade partners as well as the gloom of the tariff war. All that said, then why in the world have investors pulled more money from mutual funds and exchange-traded funds than any other time on record?!?!

So far this year, investors have withdrawn $135.5 billion from U.S. stock mutual funds and exchange-trade funds. Even crazier is that this has been going on for the past seven consecutive quarters… going back to the second quarter of 2018. In short, for nearly two years, investors feel compelled to redirect their equity investments to other “less risky” investments such as bonds and money market funds. Two asset classes that are typically used for safety and income. Unfortunately, these days, with such low interest rates, the dividends paid by blue-chip companies is greater than what bonds are yielding. So, again… why are investors doing this?!?!

If you are a client of ours, you have more than likely heard this refrain more than once: “80% of investment success is predicated on math and facts. The other 20% is behavior.” This record outflow is primarily based on people’s fears of the stock market and the current events that are playing out on a daily basis. Mainly, tariff talk and when is the next recession going to start (it has to be soon, right?). Listen to the squawk box long enough and some of the nonsense that the talking heads spew daily starts to become people’s reality. And quite frankly, it’s understandable that people get freaked out and run for perceived “safer” investments. Needless to say, this is no

t an approach we’d suggest for anyone interested in building long-term wealth.

Speaking of, there is a silver lining to this story… at least for those of us building long-term wealth. While there is much banter about the length of this bull market and it has to end sooner or later, these record outflows historically are an indicator that the stock market has even more room to run (higher). Simply, the stock market will not correct to “bear market” levels (down 20%+) if everyone is not invested in it. If there are record amounts of cash sitting on the sidelines, anytime the stock market dips 5% or even 10%, people will come rushing in to buy on these dips.

As we like to say, the dancing doesn’t stop until everyone is on the dance floor. It is only then, when a bad song comes on and everyone leaves the dance floor and there is no one left in the seats to take their spot on the dance floor. Ultimately, all investors will be in the equity markets before any meaningful correction takes place. With a strong economy to support it, this stock market still has some legs (i.e., room to rise) before the music stops. At least that’s what history tells us! We’ll have to wait and see if history truly repeats itself.


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