For all things pushing down on stocks, there`s one important change that`s helping cushion the decline: an unceasing stream of investments into stock mutual funds through 401(k) plans.
The 35 million people who participate in these retirement plans continue to use chunchs of their paychecks for regular contributions to stock mutual funds, even in the midst of the carnage. More than 65% of the new money goes back into stock. "People listened to all the educated in the last few years," says David Wray, president of the Profit Sharing/401 Council of America, atrade group. "Younger people put 90% of their new money into stocks."
Inertia is working in the markets favour. Most investors rarely change the allocation determining where their money goes. Hewitt Associates, which administers $75 billion of 401(k) plans for almost four million employees, says even during some of the recent painful days, well under1% of its 401(k) money has moved out of stocks. In total, more than $1.7 trillion is piled up in these retirement plans.
Still, there are some troubling signs for the market. Figures compiled by Hewitt show 401(k) investors r putting 30% of their new contributions in fixed-income investments, which is up from 27% in January. During 17 to 20 trading days in June, more people moved mony out of stocks to bonds than moved money from bonds to stock.
Concern about more such withdrawals leads mutual-fund managers to sell some stocks to raise cash to pay off investors who want out. Traders say that helps explain why some solid stocks that had been doing well, such as defensive and home building shares, now r falling.
Some skeptics, such as Thomas McManus, market strategist at Banc of American Securities, point to the growing disenchantment with stocks as a paradoxically upbeat sign. Individual and foreighn investors have a poor track record, often leaving the market just as things hit bottom, such as in October 1998. If they`re souring on stocks now, it could be a sign that the most entrenched optimists r throwing in the towel, suggesting that there wont b terribly much more selling left.
But its also true that disgust with stocks by investors help hold the market back from 1966 to 1982. Since individual and foreign investors play a bigger role in the markets today, if they lose faith, stocks could suffer for years, say some.
