In order for the stock market to rise, there must be more buyers than sellers. For now, I project sellers will outnumber buyers for the upcoming year. Let's review the players.
The Sellers
I believe that hedge funds will continue to be net sellers over the coming year and thereby hurt investment returns over the next year. Where hedge funds have been incremental buyers of investments in the past as they have raised money and made money that had to be reinvested, they are now and are likely to continue to be incremental sellers going forward, due to withdrawn money and investment losses. As many hedge funds are suspending withdrawals (i.e. DE Shaw, Farallon and Fortress), this selling pressure is being mitigated somewhat and will spread over a longer period as sellers who want to get out today will have to wait until next year or later.
What hedge funds do is important because they invest over $1.4 trillion in assets and if they are selling instead of buying, it will hurt prices of things we own or are looking to invest in. Adding to the selling pressure, poorly performing funds are shutting down completely causing further sales pressure and more will shut down after year end, when they know the extent of this years losses and understand that the big incentive fees they've collected in the past, will only be attainable after 50% gains to recoup 2008 losses. Furthermore, funds that have suspended withdrawals will have a hard time attracting new money as they don't want to add money to a fund that is shrinking.
The Buyers
Now, there are buyers, too. U.S. 3-month treasury bills are yielding 0% because there's lots of cash on the sidelines. There certainly are hedge funds that have large cash balances looking for investment opportunities. I believe the bulk of the sidelined cash is with indivdual investors who are, for the most part, unlikely to be early investors in a market upswing after the negative returs this year.
Surely, there will be indivdual investments that rise, and perhaps the government can print enough money that some of it will leak back into risky assets (such as stocks), but I'm not excited about investing until I "see the whites of the eyes" of more buyers than sellers.
