Blog : Big Shots Buying Stocks

by Ed Zwirn on September 20th, 2013

As commentators and traders were having a lot of fun speculating over whether the Federal Reserve would have announced a tapering of the Fed's $85 billion monthly bond buying program, institutional investors were quietly betting big that Ben Bernanke and company would do no such thing.

In fact, equity funds investing in developed markets, including the U.S., recorded what may be their biggest inflow ever in the week leading up to Wednesday's Fed announcement as investors, particularly those with a U.S. focus, bet big based on growing evidence that the central bank would refrain from tapering, or at least go light.

According to EPFR Global, a firm which traces fund flows, developed market equity funds recorded their biggest weekly inflow in the week ending Sept. 18 since they started tracking fund flows in 2000. Overall flows into stocks worldwide totaled a net $25.97 billion, eclipsing a record set in Q3 2007. U.S. stocks took in the bulk of this money, absorbing nearly $17 billion.

In another sign of increasing hunger on the part of investors for yield in the face of low interest rates, U.S. junk bonds also saw huge inflows, reversing recent losses seen for bonds as a whole.

And while some of this money came in during the afternoon which followed the Sept. 18 announcement, the vast majority came in before 2 p.m. on Wednesday, meaning that these big investors had already decided that the Fed would do nothing to upset the applecart, especially given the evidence of recent weakness in the labor market and a low level of inflation.

Since fund flows usually precede market movements, we can look at the recent stock market rally as set in motion ahead of the Fed announcement. To put it another way, only a draconian announcement by the Fed would have succeeded in derailing this week's rally.

And this rally has brought benefits for everything from blue chips to penny stocks. The Dow Jones Industrial Average, despite a correction seen today, remains up about 0.8% on the week, on track to score its third weekly gain. The broader NASDAQ is up 1.4%, beating the blue chip DJIA, and the Russell 2000 small-cap index is ahead by a whopping 1.9%.

The takeaway for penny stock investors is that this rally has legs, at least for the time being and as long as our political leaders don't screw things up. The major movers of money have already decided this is the case and they are (usually) not in the business of betting wrong.