LIANE HANSEN, host:
As we just heard, economists are predicting a positive outlook for the stock market this coming year, and investors are beginning to agree.
To talk more about this, Roben Farzad is in our New York bureau. He's a senior writer at Bloomberg Business Week. Welcome back to the program, Roben.
Mr. ROBEN FARZAD (Senior Writer, Bloomberg Business Week): Liane, it's my pleasure.
HANSEN: For the past few years, Americans have been pulling their money out of U.S. stock funds, probably for good reason. Eight months ago in May, there was a 20 minute stock plunge and it made investors more scared than ever. Is the tide really turning now?
Mr. FARZAD: We don't know. But we have, for the first time in at least eight months seen money flow into U.S. equity funds, after what's been really an epic outflow for the better part of two years. And that could be a good and a bad thing, in that, one, a good thing, you want investors to feel their oats and participate in a market, you know. It's not the kind of - the grudge, I'm never talking to you again type of mentality that we've had for much of the past 24 months.
But on the other hand, they are coming to a market that's already rallied 80, 85 percent from its low. So if you hated it at 6,600, well, why do you suddenly adore it at 11,500?
HANSEN: Can you explain why investors are returning to stocks?
Mr. FARZAD: Look, that alternatives are just so atrocious. The Fed has been bringing down interest rates to emergency levels to smoke you out of cash. You know, investors have been pouring into bond funds in kind of Internet-bubble fashion this year. I think the number is we've seen close to $700 billion going to bond funds since January of 2009.
But ultimately when you see your bank promoting, you know, half percent savings on checking accounts, you're realizing you can't subsist on this, and you're looking left and right and seeing pension funds in trouble and states going back and reneging on their obligation, you suddenly realize that maybe I have no choice but to go back into the market in some respect.
HANSEN: But you've said this trend could be problematic for individual investors. Why? What do you mean?
Mr. FARZAD: Time and again, individual investors have shown a propensity to sell at the lows and buy at the highs. And when we, you know, it's contrarian indicator, the smart money on the street says when the little guy buys in, I'm out. You know, Warren Buffett famously said that he's greedy when other people are fearful.
And maybe this is the beginning of something. Maybe it's just a flash in the pan, but if finally you're seeing some of this restive money being deployed into the stock market and going into January, when it's, you know, Roth IRA season and you're finally looking at your brokerage statements and writing out these checks, that could potentially evince some performance chasing, which has never really ended well for individual investors.
HANSEN: Right. They don't calculate too well. So if you're saying that jumping into the market right now is a bad idea for individual investors, what should they do instead?
Mr. FARZAD: They should be devout agnostics, I like to say, when it comes to this. To kind of have a strong gut. Look, the market is back to where it was before Lehman Brothers blew up. If you had fallen into a well, or, you know, something worse and just woken up today, or been retrieved out of this thing, you'd look at the numbers and, wow, by and large nothing happened, nothing transpired over the past two years.
Well, that shows that staying the course, having some modicum of discipline really pays over the long haul. Unfortunately, everybody else was really worried out there, and with just cause. I mean, banks were having difficulty staying solvent. We were worried that banks were going to renege on their dividends. Why should you give the stock market the time of day? Especially after something like the flash crash.
And so people pulled their money out and said, never again, and this wasn't the first time it happened. Certainly the Internet bust and tech bust, back in the late '90s laid old hopes bare, and so, you know, once, twice fooled, what's going to happen the third time?
This is something that unfortunately it's kind of a co-dependency that we need in this country. There's no way that people are going to make ends meet without returns above what bonds and cash are giving them now. So it's this kind of reluctant, holding their nose going back to the market.
HANSEN: Roben Farzad is a senior writer at Bloomberg Business Week, and he joined us from our New York bureau. Thank you, happy new year.
Mr. FARZAD: Right back at you, thank you. Transcript provided by NPR, Copyright NPR.