Funds Not Root Of Problem
In many disaster scripts being written these days on Wall Street, investors in stock mutual funds are cast as both the villains and the victims-to-be.
By pouring their precious savings recklessly into stock funds, these investors are said to be bidding up the market to unjustified heights.
When the inevitable letdown occurs, the pessimists warn, these same investors will pay a heavy price for their imprudence - and so might many innocent bystanders who have a stake in the health of the markets and the U.S. economy.
Nobody would be surprised to see a stock market setback of some sort. The case for a correction, if not something more severe, has been widely and persuasively argued.
But even if they go along with that caution, some analysts don’t buy the description of money flowing into mutual funds as the cause of the stock market’s rise, or as a symptom of a malady recently defined by Alan Greenspan, the Federal Reserve Board chairman, as “irrational exuberance.”
They say the facts simply don’t support the widely reported image of investors pulling all their money out of safe savings vehicles to take a flyer in stocks.
A year ago, recalls Edward Yardeni, chief economist at Deutsche Morgan Grenfell Inc. in New York, “I observed that while money was pouring into equity mutual funds, it was also pouring into short-term money market assets and deposits. The mountain of cash is still mounting.”
The amount of money in stock mutual funds soared over the past year from $1.3 trillion to $1.8 trillion, as reported by the Investment Company Institute trade association.
But over about the same span, Yardeni says, his tally of cash reserves stored in low-risk, readily accessible places - checking, savings and time deposits, money market deposit accounts and money market mutual funds - increased by $255 billion to $3.8 trillion.
Other analysts agree that efforts to decide whether the stock bull market is justified should focus on what is happening in the economy.
Says Greg Smith, investment strategist at Prudential Securities, “Whether this money coming into the stock market is evidence of ‘irrational exuberance,’ or simply sound long-term investing, ultimately turns on whether companies are generating good profits.”