Droves of Investors Missed the Bull Market—Here's Why

In the stock market, the bull is raging on.

But while plenty of investors have been reaping the benefits of one of the longest bull markets in American history, a surprisingly large number of investors have missed a big chunk of the gains.

“Investors always worry when stocks reach new highs or when they’ve risen sharply that we’re reaching the end of the bull market, and unfortunately that leads them to make mistakes where they miss some of the best gains in long-running bull markets,” says Edward Jones investment strategist Kate Warne.

According to data from Lipper, a firm that tracks $49.1 trillion of assets, institutional money managers and retail investors have taken some $140.6 billion out of equity funds so far in 2019, globally. And coupled with a sell-off in December last year, market pessimism is palpable for some investors.

But despite the outflows, the market has raged (and rallied) on. According to the MSCI index, which provides insight into global equity markets, global markets are up 16.7% year-to-date, and the U.S. fared even better, with the MSCI U.S. index up 18.9%. This increase in the equity markets seemingly flies in the face of many investors’ concerns.

Spooked by highs

While analysts argue the motivations may be mixed, the outflows seem largely motivated by fear.

Investors have been calling for a recession for the past 10 years, according to Brent Schutte, chief investment strategist at Northwestern Mutual, due in part to bad memories. The sell-offs stem from fear of history repeating itself, he suggests.

“There is still a lot of scar tissue from the Great Recession,” Schutte says. “[Investors] certainly remember what happened to them … and they’ve vowed not to let it happen again.” Schutte says that now (compared to 20 years ago), investors have been trained to “search for black swans,” or negative, unpredictable events, instead of looking for ways to make riches in the market.

In fact, many investors jumped out of equities after a major sell-off in December last year raised concerns over the next crash. But on Thursday, the Dow Jones Industrial Average hit its highest close at over 27,000 for the first time.

For investing 101, the general idea is that, when investors buy stocks, their prices go up—and conversely, when investors sell securities, their prices go down. But in the 2019 markets, gains keep growing despite investor sell-offs. Even in May, Lipper data shows that equity funds had seen steady net outflows for almost three months.

But largely supported by strong fundamentals, good earnings and the potential for a Fed rate cut, the market keeps climbing. To boot, U.S. companies executed over $270 billion in stock buybacks as of May, further bolstering equity markets.

However, for those investors who did opt out, a redirection of capital to the bond markets may be motivated in part by a continual “search for safe havens,” Schutte believes.

Rebalancing or searching for safe havens?

Investors have increasingly been allocating capital to money market funds (some $148.6 billion with less than 1% yields this year) and bonds (some $255.5 billion this year) in hopes of staving off volatility.

But while these types of securities are historically lower risk, Schutte suggests that concerns over the stock market may be pushing investors to be “okay [with] earning sub-standard returns” so long as their money is safe. “That really speaks to me about how people worrying about return of capital rather than return on capital,” Schutte says.

And the fact that there is currently $13 trillion of negative-yielding debt and $25 trillion yielding less than inflation, the safe-haven-at-all-costs hypothesis might hold water.

But Edward Jones’ Warne suggests investors may have other motivations for moving their funds from equities to bonds. She believes many investors are taking the opportunity to rebalance their portfolios and look for long-term diversification.

“After stocks have done well for a while, they become a bigger percentage of your portfolio, and if you have a target percentage and they become too big, then you’re taking more equity market risk than you intended,” Warne says.

And SEI’s Jim Smigiel is more charitable to investors as well.

“I would suggest that investors used the December market environment to re-assess their own risk tolerances and reduce their equity holdings on a more strategic basis,” Smigiel told Fortune in a note.

In fact, Rich Sega, Conning’s global chief investment strategist, suggests that the “fundamental support for the market is good,” and that if the market trades off, don’t panic—”use that as an opportunity to bring your allocation up to target,” he says.

Sega, Warne and Schutte alike believe the case for a 2020 recession is unlikely. If so, this bull market may still have room to run.