U.S. stock funds have biggest cash inflow since 2009

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Americans pumped a net $3.76 billion into domestic stock mutual funds in the seven days ended Jan. 12, the biggest weekly inflow since May 2009, the Investment Company Institute said Wednesday.

But hold off before declaring that the public is eagerly embracing the U.S. equity market again: Last week’s inflow followed a net $4.23-billion outflow in the seven days ended Jan. 5, which covered the last two trading days of 2010 and the first three of 2011.

Overall, though, the weekly data since late November suggest that fund-investor sentiment toward domestic stocks has turned more positive, or at least less negative, as the market has continued to rally.

That rally was interrupted on Wednesday, as major stock indexes fell from Tuesday’s multiyear highs. The Standard & Poor’s 500 index lost 1%, its biggest drop since Nov. 23.

Domestic stock funds, which hold about $4 trillion in all, had been suffering net outflows every week since the infamous market “flash crash” in early May -- a shift that suggested investors were fed up with Wall Street volatility.

Mutual fund cash flows measure new purchases minus redemptions. So net outflows mean that more money is going out than coming in.

Although domestic funds were bleeding cash for most of the second half of 2010, investors continued to favor foreign stock funds (which have mostly enjoyed net inflows since June) and bond funds.

But since the bond market was hit by rising interest rates in November and December, driving bond mutual fund share prices down, some investors have reconsidered their 2-year-old love affair with fixed-income securities.

The net cash inflow to taxable bond funds (such as those that own Treasury and corporate debt) slowed to $1.39 billion in the seven days ended Jan. 12, the ICI said. By contrast, those funds had mostly been taking in between $4 billion and $6 billion a week from June through October.

Tax-free municipal bond funds have had a much rougher time since November: Falling bond prices in the muni sector and worries about state and local finances have triggered significant selling of individual bonds and muni mutual funds.

Muni funds, which held about $500 billion in late November, have had net outflows every week since Nov. 10, although the pace has slowed in recent weeks. The funds saw $2.37 billion leave in the seven days ended Jan. 12, up from $2.15 billion the previous week but down from the peak outflow of $4.86 billion in the week ended Dec. 15, the ICI said.

-- Tom Petruno