Nest-Egg Scramble Just Might Hatch a Rally in Stocks
The individual retirement account isn’t as popular as it once was, but enough cash may still pour into IRAs this spring to set up a strong May rally in stocks.
That’s because stock mutual funds--which already have loads of cash on hand--traditionally garner the lion’s share of IRA dollars each year. And much of that IRA money will come in this week, as investors rush to make their 1992 IRA contributions by Thursday’s tax-filing deadline.
For reasons not altogether clear, many more Americans than last year are going right to the wire with their tax returns: The Internal Revenue Service says it expects 117 million individual returns this year, but it had just 62.8 million of them in hand as of April 2, down from 67.4 million at the same time a year ago.
If you’re filing now, chances are pretty good you’re making your 1992 IRA decision now as well. And more likely than not, you’ll buy stocks or bonds for your IRA rather than a low-yielding bank savings certificate or money market account.
Indeed, the giant Fidelity Investments group of mutual funds in Boston says it has opened 60% more IRA accounts since Jan. 1 than in the same period last year. At the Vanguard Group in Valley Forge, Pa., additional client contributions to pre-existing Vanguard IRA accounts are up 35% over year-ago levels.
Smaller mutual fund firms and brokerages aren’t necessarily seeing the same kind of blowout numbers. The IDS Funds in Minneapolis have opened about the same number of IRA accounts this year as last, a spokeswoman says. But many fund firms also say they’re taking in more IRA dollars even from a smaller base of new accounts.
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The funds are grabbing an increasingly large share of a slower-growing IRA pie. Overall, the pace of new IRA contributions has dropped in recent years, hurt by the government’s unwillingness to restore full IRA deductibility for all taxpayers and because many investors have found better tax-sheltered alternatives for retirement savings (such as 401k plans).
Money magazine estimates that $39 billion in fresh dollars was contributed to IRAs last year, down from $72 billion the year before.
Even so, the IRA pie is huge: $725 billion in total, up from $199 billion in 1985, estimates the Washington, D.C.-based Investment Company Institute. And the mutual fund industry claims to have 29.1% of those assets, double its 1985 share.
IRA investors’ shift to the funds, and to individual securities (through self-directed brokerage accounts), is partly a reaction to the big drop in short-term interest rates since the late-1980s, rendering bank CD yields terribly unappealing. But many investors have also simply become much more savvy about their money, realizing that if they’re truly saving for the long term, it’s tough to beat the stock market.
Kathryn Hopkins, executive vice president at Fidelity, says 80% of the IRA money that comes to her firm is targeted for stock funds. The most popular IRA choices, she says: conservative stock funds (such as Fidelity Growth & Income and Fidelity Equity Income) and the firm’s “Asset Manager” funds, which emphasize stocks but include bonds and cash investments for balance.
Merrill Lynch & Co. is also seeing most of its new IRA money targeted for stocks and stock funds, says Don Underwood, a vice president for retirement planning at the brokerage’s New York headquarters. And many Merrill investors are choosing international stock funds for their IRAs this year, he says--a sign that Wall Street pros’ advice about the importance of foreign-stock diversification is getting through loud and clear.
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Can this IRA money flow really make a difference in the stock market in the near term? Recent history suggests so. In 1990, ’91 and ‘92, stocks rallied briskly in May. Last year, for example, the Dow industrials shot from a low of 3,175 in mid-April to a peak of 3,400 by late May.
A host of factors affect the market in any given month, of course. But the most important common denominator for a market advance is cash in the hands of institutional investors, such as stock mutual funds. The more cash they have, the greater the pressure on fund managers to jump into the market at the first sign of a rally.
At March 1, stock funds already had unusually high cash reserves--9.5% of their assets, on average. That figure probably rose in March at many funds. With the IRA flood, fund managers may have no choice but to gear up for a new stock-buying spree--whether or not they’re particularly thrilled with prices or prospects.
Where IRA Cash Goes Investors have increasingly chosen stocks and bonds for their individual retirement accounts--a trend that shows up in the rising percentage of IRA assets held by mutual fund companies and in self-directed brokerage accounts. A breakdown of IRA assets in 1985 and 1992:
Share of IRA assets: Institution 1985 1992 Mutual funds 15.9% 29.1% Self-directed 14.8% 27.9% Commercial banks 25.9% 18.5% Thrifts 28.4% 11.5% Life insurance cos. 8.0% 8.4% Credit unions 7.0% 4.6% Total 100.0% 100.0% Total IRA assets (in billions) $198.5 $724.7
Source: Investment Company Institute
