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U.S. Investors Losing Faith In Stocks and Bonds

Even experts and investors accustomed to the volatile world of Wall Street had to admit that last week was a particularly worrisome time.

The week started with the markets ending a seven-day losing streak on Monday, as the Dow bounced up 241 points. But the very next day, the index gave back almost all of those gains as Chinese currency concerns knocked 212 points from the leading index.

By mid-day Wednesday, the market was in full-scale panic, with the Dow dropping another 277 points—only to reverse course and finish dead even on the day!

Thursday and Friday were relatively quiet days, but the damage was done. A swing of almost 750 points in only three days was enough for some investors to throw in the towel on U.S. equities. It’s been the same story throughout 2015, as money has exited the stock market in record-setting fashion.

According to recent data released by Morningstar, the nation’s leading investment resource, investors have withdrawn $78.7 billion from equity-based U.S. funds in 2015. That’s more than the amount that left the market during the financial crisis years—and this year still has five months to go!

CNBC reported that over $20 billion in investments exited the equity market in July alone—a surprising result for a month where the S&P 500 went up almost 1%, while the Dow stayed relatively flat. What’s more, two of three major stock indices (NASDAQ and S&P 500) currently show gains for the year. So why are investors so eager to flee risk investments?

First, the gains for 2015 are modest. When averaged, the three major indices are up a little less than 2% for the year. Remove the tech-heavy NASDAQ from that equation, and the market is operating at a loss for 2015. (The Dow is down more than 2%, while the S&P 500 is up just over 1%.)

Even if those numbers were to improve, the volatility seen on the market over the past 9-10 months makes a significant gain appear highly unlikely for this year. Investors are choosing to remove their exposure to risk—after all, why take the chance of losing 20% or more when the upside appears to be a very meager return?

Perhaps more troubling in the immediate future, however, is the $1.1 billion extracted from U.S. investment-grade bond funds over the past week. Over the past 15 years, activity in the corporate bond market has been a strong precursor of market trouble.

The article reported that bond investors are demanding 1.64 percentage points above government rates to own these bonds. That’s the highest premium in over two years. Moreover, the combination of bond rate premiums and market volatility is at its highest level since March 6, 2008. In the year following that date, the S&P 500 saw its value slashed in half.

This summer, domestic and international markets have suggested an impending end to the bull market of the past 6+ years. Now statistics, history and investor behavior are sending their own strong warning signals.

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