Investors flee stock funds at rate not seen since 2008 panic

NEW YORK  The market turmoil sparked by the downgrade of the USA's triple-A credit rating caused mutual fund investors to sell U.S. stock funds at a rate not seen since the financial crisis in October 2008.

In the week ended Aug. 10, which included the two days leading up to the Standard & Poor's downgrade and the first three trading days that followed, net outflows from domestic stock funds were $23.49 billion, the Investment Company Institute says. That was the biggest weekly outflow since Oct. 15, 2008, just four weeks after the bankruptcy filing of Lehman Bros. almost toppled the world financial system.

Investors' decision to take a more conservative stance isn't surprising, given the historic price swings in the Dow Jones industrial average, the nation's first-ever debt downgrade, a patch of weak economic data and negative headlines out of Europe, says Quincy Krosby, market strategist at Prudential Financial.

"When you see swings of that magnitude, it makes investors nervous," Krosby says. "They remember 2008. They always feel like they are the last ones out. This time they were doing what hedge funds were doing: getting out while they can."

U.S. stock funds have suffered outflows 16 weeks in a row, the longest streak since the 34 weeks following the May 6, 2010, "flash crash."

The mass sales suggest last week's record volatility spooked investors as much as the banking crisis in 2008 and last year's short-lived flash crash.

While the outflow dollar amount is "eye-catching," says Brian Reid, the ICI's chief economist, it is tiny compared with the estimated $6 trillion of total assets invested in stock funds. The latest week's outflows "account for one-half of 1% of all equity assets," he says.

"The vast majority are staying put," Reid says.

The decision to sell 16 weeks ago was a good one. The streak began two days before the market's 2011 peak. And the big bucks yanked out in the most recent week marked the bottom in the recent downdraft. Investors who have been out of the market all 16 weeks avoided virtually all of the market's 17.8% drop.

The problem with getting out of the market is knowing when to get back in. Stocks are up 6.5% since the Aug. 10 low. Investors are likely to remain sidelined until the question of whether the economy will suffer a double dip is answered, analysts say.