Clues help strategize return to stock funds

You admit it: You sold all your stock funds in your 401(k). When danger reared its ugly head, you bravely turned your tail and fled. Now you have another task, which is figuring out when to get back in – and what to buy.

If you’ve sold stock funds recently, you’re certainly in good company. Investors pulled $47 billion from U.S. stock funds in October, according to the Investment Company Institute, the funds’ trade group. Charles Biderman, president of TrimTabs.com, which tracks money flows in and out of mutual funds, estimates at least $45 billion came out in November.

Selling in the face of a downturn isn’t particularly irrational. Stocks tend to fall in the initial phases of a recession as economic activity and corporate profits drop. Trying to find stocks or funds that don’t fall in a recession takes far more time than the average U.S. worker has. And it’s tough sledding in any event: By definition, the vast majority of stocks fall in a bear market.

Your best strategy for getting back into the stock market, and one that requires no crystal ball, is to increase your stock allocation in your 401(k) plan a bit each month until you reach your comfort level. But if you want reassurance that you’re doing the right thing, you can look at a few useful indicators.

Start by taking a look at the index of coincident indicators, produced by the Conference Board, a private research firm. The coincident indicators, the lesser-known cousin of the leading economic indicators, measure what’s going on in the economy now. You’ll want to see the coincident indicators rising two months in a row after a three-month rise in the leading indicators before you could assume that a recession has ended. You can find the coincident indicators (as well as the leading indicators) at www.conference-board.org.

Because this downturn was sparked by a slump in real estate, you should also keep tabs on home prices. It’s unlikely the economy will get back on its feet without a real estate recovery. A good place to start is the Case-Shiller home price index, at www.standardandpoors.com.

But Wall Street looks ahead, and stock prices start to rise several months before a recession ends. Biderman suggests looking for a few signs that Corporate America believes the worst is over:

•Corporate buyback announcements. Buying back stock isn’t a brilliant move: Most investors would like to know that management has better ideas for using its money. Lately, however, many companies have suspended their buyback programs, preferring instead to hoard their cash against tough times. When companies start buying back shares again, Biderman figures, you’ll know they’re confident enough to spend a little.

•Dividend increases. This year, 200 companies have decreased their dividends, according to Standard & Poor’s, vs. 44 for all of 2007. When you start to see more companies increase their dividends – and fewer decrease them – you’ll get a sense that Wall Street is confident again.

•Employment. Look for help-wanted ads to rise and mass layoff notices to fall.

Another good indicator: Wait for the National Bureau of Economic Research to announce the official date of when a recession started. It takes NBER’s Business Cycle Dating Committee many months to pinpoint the date – and by that time, a recession is often in its final months.

What should you buy when you’re feeling confident again? In this downturn, credit quality and financial strength are two overwhelming questions facing financial markets. That’s why investors have flocked to Treasury bills. Demand for Treasuries has gotten so strong that Wednesday, investors were willing to accept a 0.04 percent yield on a three-month T-bill. At that rate, you’ll double your money in 1,734 years. It’s unlikely that investors will emerge from this bear market clamoring for risky investments. Instead, consider funds that invest in high-quality, dividend-paying stocks. Equity-income funds do just that.