The S&P 500 Index has risen by a compound average of 11.5% a year since the end of 2008, and returned 16%, including dividends, last year. But as we noted recently- investors didn’t believe in the rally. Over the past two weeks, however, investors have been putting more money into equity mutual funds than they have taken out, something they haven’t done since early 2011. Actively managed equity mutual funds attracted $23 billion in net new flows and U.S. equity ETFs also saw $13.4 billion in net new flows during the same two-week time frame.
The sentiment of equity investors appears to have finally improved as global economic data has strengthened, and major concerns over the U.S. fiscal cliff and the European sovereign debt crisis have eased. Equities have seen the outperformance that market commentators have promised over the past several years. But now that investors seem to be more comfortable with equities, does that mean the market rally is done?
There’s reason for the skepticism. Historically, it’s been a good time to get out of stocks when investors are felling incredibly bullish. The opposite trend’s worked, too – some investors have done quite well buying into stocks at moments of maximum pessimism. We think the current situation, as you can see from this week’s OppChart, lies somewhere in the middle. Sentiment has turned more positive than it has been for almost 5 years, but it is still not at euphoric levels that would caution us to tread warily around stocks. Despite solid market gains behind us, we don’t believe irrational exuberance, as Alan Greenspan might call it, of investors is a problem just yet.
 Source: Investment Company Institute as of 1/24/13. All data is estimated weekly net new cash flow
 Source: Morningstar Direct Net ETF flows as of 1/24/13. Data is calculated by combining the U.S. Stock, Sector Stock and International Stock ETF flow categories