Lots of folks are wondering where the retail investor has gone. There is some instructive “thinking out loud” as to what is going on: Why there is such light volume, why has financial television ratings plummeted, why has America fallen out of love with equities.
The short answer is that there is no single answer. It is complex, and not subject to single variable analysis. This annoys pundits who like to reduce complex and nuanced issues to easily digestible sound bites. Television is not particularly good at subtlety, hence these silly single factor bull bear debates.
We can easily put together a listicle of the top 10 reasons why investors are unenthused about the stock market. These are what I suspect has been driving the average investor away:
Secular Cycle: There are long term cycles of alternating bull and bear markets. The current bear market that began in March 2000 has provided lots of ups and downs but no lasting gains. Markets are effectively unchanged since 1999. The way secular bear markets end is with investors ignoring stocks, enormous P/E multiple compression, and bargains galore. Bill Gross and his Death of the Cult of Equities is a good sign we are getting closer to the final denouement; we are not there yet, but getting closer.
Psychology: Speaking of which, investors are both scarred and scared. They have been scarred by the 57% crash, and scared to get back into equities. While this is a necessary part of working towards the end of a secular bear, its no fun for them – or anyone who trades or invests for a living.
Risk On/Risk Off: Let’s be honest – the fundamentals have been utterly trumped by unprecedented Central Bank intervention. While this may be helping the wounded bank sector, its not doing much for longer-term investors in either fixed income or equities. When investors can longer fashion a thesis other than “Buy when the Fed rolls out the latest bailout,” it takes a toll on psychology, and scares investors away.
Poor Returns Across All Asset Classes: Investors have been burned by a series of booms & busts: Dotcom stocks (2000), real estate (2006- ?), equities (2008-09) Gold (2011-12). Perhaps after these experiences, too many Investors have decided that investing isn’t such a great deal after all.
Deleveraging: The marginal buyer is out of the market as they de-leverage their excess credit consumption. An entire cohort of investors is no longer playing with equities. Indeed, they are priced out of all investment options as they rebuild their personal balance sheets.
Wall Street Scandals, part I: First the market gets blown up by bankers, then Wall Street gets rescued. Meantime, Main Street gets nothing. If you don’t think the credit crisis and Great Recession has moved people to stay away from the casino, you are kidding yourself. The people who believe the game is rigged aren’t conspiracy nuts, they are merely observing appearances. At the very least it appears that bankers have corrupted the political process for their own gains.
Trendless Economy & Markets: The soft economy does not get investors fired up about putting risk capital to work. And a range-bound market simply makes trading too challenging for most participants. Paying fees for zero returns as we saw in 2011 isn’t encouraging either.Wall Street Scandals, part II: MF Global, Peregrine Financial, Knight Trading, Standard Charter and JPMorgan – another set of factors that are convincing investors to stay away. Theft and incompetency appear rampant, ethical transgressions seem to be part of ordinary business. This has led some people to ask why on Earth they should trust their hard earned money to those guys? No prosecution looks like that much more corruption.
High Frequency Trading (HFT): Investing is a zero sum game. Its not that complex for some people to figure out they are being ripped off by the Exchanges and the HFTs. Front running was once a crime, and know its part of the capital markets basic structure.
ETFs: Some people seem to have wised up to the Stock picking game. Its certainly fun while its working during rampaging bull markets, when correlations go to 1 then it is no longer doable or fun. Add to that the advantages of lower costs, fees, taxes and turnovers, and the traditional stock-picking approach looks like a fool’s errand (yes, I’m talking my book here).
I post this list not because I believe they are all factually correct — although there is much truth in them — but because these are the reasons why many investors have voted with their feet.
What will bring this long bear cycle to its end? Nothing other than the passage of time . . .