In the spirit of ‘do-the-opposite’ I’m thinking the worst may be over for the estranged ‘mutual funds’ that invest in U.S. stocks. My first indicator, is that finally cash is exiting money market funds. I disagree with this headline though:

from BLOOMBERG July 29, 2011:  “Money Funds Have Biggest Redemptions This Year Amid Debt Talks.”

I seriously doubt that investors are abandoning money market as implied because of fears concerning U.S. or for that matter even European debt woes – after all it was the financial crisis that drove them into short term (cash) in the first place. An article that suggested mutual funds are “dead” cited fund flows over the past ten years as evidence. Here is the chart from the article:

Domestic (i.e. US domestic) stock funds show negative growth over the entire 10 years. Keep in mind that all such data (just like rates of return) are extremely biased by the end point – and the massive redemptions, declines in assets under management, with little offsetting sales in equity funds during the financial crisis, would naturally cancel much of the growth in equity funds during the earlier years.

Nevertheless, it begs the question: Where is cash being withdrawn from money market going to go? In Canada, there’s plenty of evidence to suggest investors are getting back in the game (retail investors could be better at timing their entry points as usual). Long term (stocks) fund sales are finally showing signs of life, and I’d expect the same scenario is developing in the United States.

If you agree with my prior commentaries, that the U.S. is looking better than ever despite (maybe because of) the current contagion of bearish sentiment, then the cause of a stronger end for the third quarter and possibly fourth quarter for stock market returns is easy to conjecture – redemptions from money market (and other cash eqivalents) funds need a home, and equity funds (including ETF’s), & balanced funds will have buyers.

Prior to 2008, much of the growth in funds was enjoyed by international and emerging market funds at the expense of domestic equities. Look for a reversal which should contribute to a bouyant rebound in U.S. stocks.

Invest to Live, Live to Ride