Contrary to recent thinking, the torrent of money gushing into mutual funds is not driving the current bull market in stocks, says a Wall Street economist who has scrutinized consumer savings patterns.

"The fundamentals, primarily good corporate profitability and low interest rates, are still the main forces behind the market," according to Rosanne M. Cahn, chief equity economist at CS First Boston Corp.

The spectacular growth of the mutual fund industry has prompted many Wall Street observers to debate the chicken-or-the-egg question of whether equity mutual fund inflows have propelled stock prices or the soaring market itself attracts the funds.

After studying the relationship of stock price moves to fund sales, exchanges, and redemptions surrounding the October 1987 market crash and later recovery, Ms. Cahn has concluded the answer is-neither.

Statistical analysis shows that big fund inflows do not precede upward price changes "with any meaningful regularity." At the same time, the link between price gains and inflows the succeeding month is "too weak to be meaningful."

But declines in the stock market are a different matter. Fund shareholders may not react immediately to rising prices, but they head for the exits at the first bearish move and then take their time in returning.

"Selling of equity mutual funds consistently leads declines in prices with a one-month influence, and declining stock prices elicit sales, especially exchanges out of equity funds into other types of mutual funds," Ms. Cahn wrote.

The contradictory findings for up and down markets may appear irrational, Ms. Cahn said, but they are not unreasonable. Indeed, they are no doubt deeply rooted in human psychology.

"If humans, or any species, didn't pay more attention to negative events than positive ones, they wouldn't survive. That is our chemistry," Ms. Cahn suggested in an interview last week.

A declining market naturally evokes powerful sentiments of fear, skepticism, risk aversion, "and a strong desire to preserve capital," she said.

In short, comparing the two famous drivers of the stock market, greed may sometimes be powerful, but it cannot really compare to fear as a primal force.

The flow of funds surrounding the 1987 market crash and subsequent recovery dramatically illustrates the pattern of rapid response to bad news and slow response to good news.

"Net inflows into equity mutual funds averaged $2.1 billion per month in 1986, accelerating to $3.2 billion per month in the first three quarters of 1987," Ms. Cahn said. "That reversed sharply to a net outflow of $6.5 billion in October, the month of the crash."

"Outflows persisted through the spring of 1989, 16 months after the stock market bottom in November 1987," she said. "At that time, the stock market was more than 20% above its low."

Net inflows into equity funds consist of new sales of fund shares, plus reinvested dividends and exchanges from other funds, minus redemptions and exchanges into other funds.

New sales of equity funds did not exceed precrash levels until the end of 1989, Ms. Cahn noted, while exchanges into equity funds from other funds took still longer to exceed earlier peaks.

The most important point, however, is that the stock market came back from the 1987 crash without the help of equity mutual fund investors. It did so "because the fundamentals were auspicious," Ms. Cahn said.

"Corporate profits and economic growth were healthy," she said. "The bond market rally initiated by the crash was reinforced by the Fed's lowering of interest rates. In the end, all the crash did was erase the severe overvaluation of stocks that developed in the summer of 1987."

But Ms. Cahn does not dismiss the significance of equity mutual funds.

The portion of household savings going into equities remains below the share in the 1960s, she said. After bottoming at 28% in the early 1980s, the share has climbed back to 39%-still short of the 40%-45% in the '60s.

As this adjustment trend continues, stocks should get strong demand-side support from small investors over the longer term, she said.

"This continued reallocation gives depth and duration to up moves-but does not cause them," she said. "It makes the upward moves surprisingly strong and makes market corrections surprisingly weak."

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