2/15/2012 5:54 PM ET|
Where have all the investors gone?
Stocks have been on a tear in 2012, but trading volume keeps falling. Here's why so many investors just don't want to play -- and a simple way to restore their trust.
The most amazing thing about the stock market's recent rally hasn't been its impressive gains. Or the fact that it's happened despite all the structural issues that still plague the economy.
It's that more average investors haven't been lured back into the game. In fact, at least one measure of stock-market trading activity has dropped to levels last seen in 1999.
This despite the best efforts of Wall Street -- and of its central banking allies, who have pumped tons of cash into the system -- to get the market moving up for good. People looking to simply build retirement nest eggs or college savings aren't sold.
After years of stomach-churning volatility, scandals, bubbles and the rise of market-manipulating trading computers, American investors have had enough. They're choosing to park their cash in bonds, despite returns that in many cases don't even match inflation. What money they have in stocks sits uncomfortably in bland and broad index funds -- investments you make because you lack options, not because you're hopeful.
Thus, we're in the midst of a long ice age for stocks -- a deep freeze not unlike the long sideways scrambles seen during the Great Depression and World War II. The market can't get healthy if people don't want to play.
This isn't likely to end anytime soon. Here's why -- and how companies can break the cycle with one simple change.
Is anybody out there?
Sure, there are signs some investors are getting excited again. For example, the total money betting on a market decline via the Rydex mutual funds family dropped last week to an all-time low, passing levels last seen January 2001 and May 2011. (Both were bad times to be bullish; major market declines followed soon after.)
But this doesn't tell us much about everyday investors -- most of them don't short.
Rather, while stories about disillusioned investors are not new, the evidence is mounting that they plan to stay gone. There's no official head count of those who've given up on stocks, but consider these trends:
● Trading volume on the NYSE dropped to a fresh nonholiday decade low earlier this week. Prices are rising, but few investors are buying. This isn't the self-perpetuating feeding frenzy that keeps a rally rolling.
● The 50-day average of trading volume has returned to levels last seen in 1999 -- despite an economy that is now $2.4 trillion larger.
● This is happening against a backdrop in which computers are doing more and more of the trading. Computer-driven trading accounts for nearly 80% of trading volume now, according to researchers at Northwestern University. If trading levels are unchanged and computer trading is up this far, individual investors have left.
● Data from the mutual fund analysts at EPFR shows that foreign and domestic equity holdings have dropped below levels seen in 2001, as cumulative outflows have outpaced inflows. Over the past decade, more cash has come out of stocks via mutual funds than has gone in.
All this tells me a lot of investors have left the building. And it's hard to fault them.
Invest in this mess?
Sure, the major indexes are up right now. But they're only regaining past highs. We've been here before.
Despite all the bailouts, credit downgrades, government spending, austerity pledges and middle-of-the-night summits, the structural situation remains a mess here and abroad. Policymakers are focused on austerity and budget cuts, not growing economies. Company profits have been high, but they're rolling over. The eurozone is tipping into a new recession. The U.S. economy is hesitating as temporary drivers -- such as people tapping their savings to buy holiday gifts -- fade.
People are facing stagnant wages and rising prices, and they are still worried about their jobs. It doesn't help that gas prices are pushing toward new highs.
More broadly, we just don't trust the market.
It wasn't that long ago, after all, when average folks buzzed about how stocks were enriching their 401k's, and workers looked forward to retiring early. Now we long for real pensions and hope we don't get involuntarily retired. That's a sea change. And it's reflected in the data.
EPFR's database shows that our love affair with stocks has died. Since the 2007 high, the amount of money held in stock-based mutual funds has dropped by nearly $400 billion. Cumulative inflows into equity funds over the past 10 years total just $43 billion.
Meanwhile, investors have overwhelmingly shifted to bonds. Over the past 10 years, cumulative inflows into bond funds have totaled more than $772 billion, with the vast majority coming since the 2007 stock market peak. This shift is all about the perceived safety and security of the steady stream of payments bonds provide, versus the unreliable returns of stocks.
One example: The NYSE Composite Index ($NYA.X), despite corporate earnings surging to new record highs, is trading 20% below its 2007 peak.
Even in the midst of the recent rally, there are warning signs flashing red, like the rise in the CBOE Market Volatility Index ($VIX), the weakness in materials stocks -- especially steel-makers like AK Steel (AKS, news) -- and the pullback in high-yield corporate bonds. Or the fact that signs of market instability are resurfacing, signs eerily similar to the May 6, 2010, "flash crash" that featured a plunge of nearly 1,000 points in the Dow as Athens burned.
Well, once again, Athens is burning. And once again, markets are freezing, with crude oil futures getting shut down on Monday for more than an hour as computers -- an "algo" trading system -- overloaded the CME's Globex crude market.
VIDEO ON MSN MONEY
This is what happens when the market watch dogs fail to act. The SEC, Treasury Dept.,FBI,NYSE and Congress. Layer, after layer, after layer of “Security” and “Market Protectors” and none of them really did anything before or since the 2008 “Crash of Corruption”.
There’s no real market now because its “Integrity” was not protected.
HHHMMM, decent article but some of the main reasons I avoid stock market are:
1.) I see a lot of the profits a skimmed from long term investors by day traders and short selling.
2.) Inside trading is grossly overlooked
3.) Companies accounting practice are unaccountable (crooked)
4.) The Brokerage system is a RACKET. Open market but have pay fees for someone else to play with your money.
The average person has little to no chance of getting a decent return on invest/savings.
The Federal Reserve manipulates the value of money. Savings & Interest rates are kept low because people are smart enough to get off a sinking ship and run to Bonds and savings accounts.
I am a big SAVER but I have been trying to over come this and learn to spend lavishly now why still can and still young enough to enjoy it.
I guess the public has learned; and wrt PT Barnum having said "a sucker is born every day", they've chosen not to be that sucker, personally. Good for them. It shouldn't be up to the little guy to risk financial ruin at a time they're likely facing hard economic choices and worries over whethe they'll still have a job next year, can continue paying their bills, etc; to prop up the entire system.
People just buying in, because the Fed pumped money in there; isn't a wise decision or in the least fiscally responsible. So ahem, yeah companies are outsourcing to save a buck; and care about their bottom line first and fore most? Well guess what, the little investor shouldn't be different in that regard. Saving their own bottom line, and remaining fiscally sound so they won't end up with a mortgage they can't pay, or gambling away the money they need to pay their bills is just as reasonable for them; as making cuts and saving the expense is for companies also. Get used to it. Individual households should think about themselves, and their own bottom line, first and foremost as well :p
Individual investors have their biggest impact on the market in their peak earning years (when they are in their 40s and 50s). The recession has hit this group hard, and many cannot afford to take risks in the market with what little remaining funds they have.
After the the crash in 2001 I moved to cash. I still have my established IRA 's that I have had since 1989 all in sturdy mutual's but not a cent more from this old woman since 2001. I do not care about returns I have seen my capital disappear twice. In 11 years I have not recovered the loss of 2001. I have a lot of cash and it feels good knowing that I get to spend it and not see it evaporate. The average investor is scared and pissed. I had most of my retirement in Utilities the widow and orphan haven and still lost it.
Cash is nice. I do wish for a better return on CD's but will do with zero growth to keep the nut.
Peoples life's were ruined and no one from wall street went to jail. It sucks. I long for the days when folks who mismanaged pension funds went to jail.
We were all encouraged to start IRA's and 401's. A lot of good they did us.
Well let's see, The fed has pressed down interest rates so far that seniors can't live on their savings. The market
drops like a rock and rallies a hundred points in the last 15 minutes before the market closes to post a gain. Bankers
trade depositors funds in the market but no one goes to jail. Do ya think things are being manipulated or is this a honest market? I think the former!
Almost all of IRA and 401K is in bonds and mutual funds. 95% out of direct investments in stocks and equities. Only own TWO stocks (Costco is one). Sick and tired of "wall street" manipulating the market for the gains of the fattest PIGS in this country (the 1%) by luring the average consumer into something just so they can short it and make millions (that the average consumer pays for). Sick and tired of Wall Street "experts" telling US what companies SHOULD earn, and then when the company misses it by 1%, Wall Street PIGS short the stock, then SLAM the company publically, causing the stock to drop 15% and they rake in BILLIONS in profits.
Yeah, it is called the average American is finally wising up against the LIES and GREED (the 1%) that control and manipulate the market and are finished playing their game.
In the economic situation we've been in since 2007, maybe the public has decided to go back to the basics: don't put money in the stock market that you can't afford to lose.
Besides, unless you study and fully understand the economic conditions of specific stocks, there may not be much profit to be made in the overall market right now. The profits in the overall market came to those who invested when the market dropped to 9,000, 8,000, 7,000 - a time when the general public didn't know where their next meal was coming from. Invest now and you could be buying into the next wall street pyramid scheme.
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There was no specific news catalyst behind today's slide, which had the markings of broad-based profit-taking. Seven of ten sectors settled with losses of 1.0% or more while only two groups ... More
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