Investors Cautiously Return to Stocks

As positive economic news continues, including a 20% increase in stocks since September, investors are beginning to embrace risk once again.

With the Barclays Capital U.S. Aggregate Bond Index down nearly 3% in the past three months, investors have begun pulling money out of bond funds at the fastest rate in two years. Since mid-November, investors have redeemed more than $20 billion from bond funds. This follows the staggering $640 billion they invested in bond funds since January 2009.

And, finally, they are beginning to move back into stocks. For the week ended Dec. 21, investors placed $335 million into U.S. stock funds—the first positive weekly net inflow into U.S. equity funds since late April, according to the Investment Company Institute.

“At the end of the year, a lot of investors have been looking at what stocks have been doing and asking, ‘What am I sitting in bonds for?’” Birinyi Associates Strategist Cleve Rueckert told the Associated Press.

“You’ve almost got a one-two punch, with stocks up and the bond market taking a pretty big hit,” added Ron Saba, director of stock research at Horizon Investments. “So now you start to see psychology take over. Investors say, ‘I want to invest where I’m making money.’”

Certainly, the trailing P/E ratio of S&P 500 stocks, at 15.75, is far below the average 23 of the past 20 years. And the Chicago Board of Options Exchange Volatility Index is at its lowest point in eight months, as a result of less volatility in the markets.