Forex Trading

The Federal Reserve’s Jan. 22 emergency rate cut arrives at a time when investors are rapidly running away from stocks, a sign of plummeting confidence in both the economy and the market.

Last month, investment researcher Morningstar («www.businessweek.com») says, investors pulled a net $27 billion from equity mutual funds, the biggest outflow of funds since July, 2002. Only halfway through January, investors had already yanked another $36 billion from equity funds, according to «investing.businessweek.com».

While some fund managers argue stocks are now selling at attractive bargain prices, individual investors clearly aren’t taking the bait. Even the mightiest companies have been tripped up. Stocks that provided huge gains in 2007—such as investor favorites Google («www.businessweek.com»), Monsanto («www.businessweek.com»), and First Solar («www.businessweek.com»)—have suffered as sellers took profits while they still could. More Sellers Than Buyers

“Right now, almost across the board, there are more sellers than buyers,” says Bob Bacarella, portfolio manager of the Monetta Fund («www.businessweek.com»).

Since the start of the year, the S&P 500 is off almost 11% and the Dow Jones industrial average has dropped almost 10%. Stocks recently accelerated their descent, but individual investor dollars have been flowing away from the market for months. TrimTabs estimates $106 billion has left U.S. equity mutual funds since May, a torrent not seen since $102 billion exited those funds over nine months in 2002.

When recessions loom, investors often jump into defensive sectors such as consumer staples. They latch onto firms like Coca-Cola («www.businessweek.com»), which sell products supposedly in demand in any economic environment. But while such firms have outperformed the market in 2008, they still have lost value, hurt by a scarcity of buyers. “Most investors are sitting on the sidelines watching this thing,” says Bacarella. “Everybody’s taking a beating.” Beware the Falling Knife

Fund managers say they have spent time trying to soothe their investors’ frayed nerves. Matthew Kaufler, manager of the Touchstone Value Opportunities Fund («www.businessweek.com»), says he tells clients it’s too late to escape the correction. “The time that the recession has you in its grips is not the time to be selling stocks,” he says. That time was in October, when stocks hit their records.

Still, few suggest investors go on an aggressive buying binge. As the saying goes, you don’t want to catch a falling knife. The stock market offers bargains now, but if it fell another 10% to 15%, the bargains would be even better.

The Jan. 22 emergency rate cut, which followed a plunge in stock markets around the world, intensified recession fears. But, says Sam Stewart, chairman of fund manager «investing.businessweek.com», the evidence on the economy is actually mixed. While many economists say a slowdown in the U.S. is likely, a full-blown recession remains just a possibility. Worst to Come?

There’s still a question of how much problems in the financial system are “spilling over into the real economy,” Stewart says.

The Jan. 22 statement from the Federal Reserve was hardly reassuring. The Fed cut interest rates by three-quarters of a point “in view of weakening of the economic outlook and increasing downside risks to growth.” Ominously, the Fed said “Incoming information indicates a deepening of the housing correction as well as some softening in labor markets.”