More encouraging news

By now you have all heard me say that what the U.S. consumer does largely determines what the U.S. economy does. You see it’s just a matter of the sheer mass of the U.S. consumer: 66-70% of gross domestic product comes out of our pockets.

The Investment Company Institute, which is the leading mutual fund organization, said yesterday that long-term stock funds saw net positive cash inflows for the 12th straight week. Given that the net cash inflows to money market funds are negative, it seems that many consumers are moving out of cash and into the stock market. Institutional investors also seem to be following the trend (e.g. insurance companies, brokerage houses, pension funds).

Because so many folks (wrongly) look to the stock markets as a shorthand and daily indication as to how the economy is doing, the fact that many consumers are returning to the stock market is a great sign as it means their confidence in the economy and in businesses is increasing. Another important thing to note is that 12 weeks represents 3 months of positive net flows into the stock market. If you read back over the blog, especially last falls postings, I said that there was a lot of cash out there sitting on the sidelines waiting for the panic and paranoia to subside. The stock market has both “vicious circle” and “virtuous circle” properties; in scientific terms, it has feedback effects. People see the stock market rise so they invest more money which causes prices to rise which causes more investing. Repeat spin cycle…as in, hype cycle. I don’t like it, but that’s how it works. And I am glad that I invested and insisted that all of you invested when the market bottomed in early March. Go virtuous cycle, go!

Jason