Who’s Buying? Companies. Who’s Selling? Everybody Else. How Will It End? Not Well!

via NYT:

Armchair investors have been selling stock.

So have pension funds and mutual funds, as well as a whole other category of investors — nonprofit groups, endowments, private equity firms and personal trusts.

The stock market is off to its best start since 1987, but these investors are expected to dump hundreds of billions of dollars of shares this year.

So who is pushing prices higher? In part, the companies themselves.

American corporations flush with cash from last year’s tax cuts and a growing economy are buying back their own shares at an extraordinary clip. They have good reason: Buybacks allow them to return cash to shareholders, burnish key measures of financial performance and goose their share prices.

The surge in buybacks reflects a fundamental shift in how the market is operating, cementing the position of corporations as the single largest source of demand for American stocks. The binge has helped sustain a bull market approaching its 10th birthday, even in the face of political, international and economic uncertainty.

Since the market rally began in March 2009, the S&P 500 has risen more than 300 percent as the United States recovered from the worst financial crisis since the Great Depression. But few expect those kinds of gains over the next decade. Facing the prospect of a period of relatively low returns — or even a bear market for stocks — many investors are eager to protect their gains or to find more appealing investments, like emerging markets and corporate bonds, outside the American stock market.

“There’s no reason to be a hog,” said Rich Robben, interim chief investment officer of the Kentucky Retirement Systems, which manages more than $17 billion in the state’s retirement and insurance funds. “We’ve all eaten at the public equity trough very well for 10 years now. And we felt it was just time to reduce that exposure a bit.”

Mr. Robben said his pension fund, which pays benefits to more than 100,000 retired state and county workers, has been cutting its stake in the domestic stock market for 18 months.

Such prudence paid off late last year, when concerns about a sluggish global economy, rising interest rates and slowing corporate profits hit the market. The S&P 500 fell 14 percent in the fourth quarter, and 9 percent in December alone. That was the worst monthly performance since February 2009, and badly shook investor confidence.

Since the worst of the sell-off, on Dec. 24, the S&P 500 is up roughly 19 percent. But data show that many investors remain nervous: In every week this year, money has flowed out of domestic stock market mutual funds and exchange-traded funds — as much as $15 billion in the last week of January, according to EPFR Global, which tracks flows into and out of funds. These investors, overwhelmingly individuals, have moved money into bonds and cash.

Henry Crutcher has missed a bit of the rebound. Mr. Crutcher, a 44-year-old software company owner in Atlanta, saw December’s crack in the stock market as a buying opportunity and moved roughly 10 percent of his portfolio from cash into a Russell 2000 exchange-traded fund. After enjoying a couple weeks of rising stock prices, he sold it, missing much of the roughly 10 percent of additional gains that have come since mid-January.

“Right now I’m partially invested,” Mr. Crutcher said. “I’m not totally sitting on the sidelines. But I’m more on the sidelines than I think I should be.”

Survey data suggests portfolio managers at many mutual funds and hedge funds have also been skittish about chasing the market higher.