Ordinary folks losing faith in stocks

Andrew Neitlich is the last person you'd expect to be rattled by the stock market.
Associated Press
Dec 27, 2012

He once worked as a financial analyst picking stocks for a mutual fund. He has huddled with dozens of CEOs in his current career as an executive coach. During the dot-com crash 12 years ago, he kept his wits and did not sell.

But he's selling now.

"You have to trust your government. You have to trust other governments. You have to trust Wall Street," says Neitlich, 47. "And I don't trust any of these."

Defying decades of investment history, ordinary Americans are selling stocks for a fifth year in a row. The selling has not let up despite unprecedented measures by the Federal Reserve to persuade people to buy and the come-hither allure of a levitating market. Stock prices have doubled from March 2009, their low point in the Great Recession.

It's the first time ordinary folks have sold during a sustained bull market since relevant records were first kept during World War II, an examination by The Associated Press has found. The AP analyzed money flowing into and out of stock funds of all kinds, including relatively new exchange-traded funds, which investors like because of their low fees.

"People don't trust the market anymore," says financial historian Charles Geisst of Manhattan College. He says a "crisis of confidence" similar to one after the Crash of 1929 will keep people away from stocks for a generation or more.

The implications for the economy and living standards are unclear but potentially big. If the pullback continues, some experts say, it could lead to lower spending by companies, slower U.S. economic growth and perhaps lower gains for those who remain in the market.

Since they started selling in April 2007, eight months before the start of the Great Recession, individual investors have pulled at least $380 billion from U.S. stock funds, a category that includes both mutual funds and exchange-traded funds, according to estimates by the AP. That is the equivalent of all the money they put into the market in the previous five years.

Selling during both a downturn and a recovery is unusual because Americans almost always buy more than they sell during both.

Since World War II, nine recessions besides the Great Recession have been followed by recoveries lasting at least three years. According to data from the Investment Company Institute, a trade group representing investment funds, individual investors sold during and after only one of those previous downturns — the one from November 1973 through March 1975. And back then a scary stock drop around the start of the recovery's third year, 1977, gave people ample reason to get out of the market.

The unusual pullback this time has spread to other big investors— public and private pension funds, investment brokerages and state and local governments. These groups have sold a total of $861 billion more than they have bought since April 2007, according to the Federal Reserve.

Even foreigners, big purchasers in recent years, are selling now — $16 billion in the 12 months through September.

As these groups have sold, much of the stock buying has fallen to companies. They've bought $656 billion more than they have sold since April 2007. Companies are mostly buying their own stock.

On Wall Street, the investor revolt has largely been dismissed as temporary. But doubts are creeping in.

A Citigroup research report sent to customers concludes that the "cult of equities" that fueled buying in the past has little chance of coming back soon. Investor blogs speculate about the "death of equities," a line from a famous BusinessWeek cover story in 1979, another time many people had seemingly given up on stocks. Financial analysts lament how the retreat by Main Street has left daily stock trading at low levels.

The investor retreat may have already hurt the fragile economic recovery.

The number of shares traded each day has fallen 40 percent from before the recession to a 12-year low, according to the New York Stock Exchange. That's cut into earnings of investment banks and online brokers, which earn fees helping others trade stocks. Initial public offerings, another source of Wall Street profits, are happening at one-third the rate before the recession.

And old assumptions about stocks are being tested. One investing gospel is that because stocks generally rise in price, companies don't need to raise their quarterly cash dividends much to attract buyers. But companies are increasing them lately.

Dividends in the S&P 500 rose 11 percent in the 12 months through September, and the number of companies choosing to raise them is the highest in at least 20 years, according to FactSet, a financial data provider. Stocks now throw off more cash in dividends than U.S. government bonds do in interest.

Many on Wall Street think this is an unnatural state that cannot last. After all, people tend to buy stocks because they expect them to rise in price, not because of the dividend. But for much of the history of U.S. stock trading, stocks were considered too risky to be regarded as little more than vehicles for generating dividends. In every year from 1871 through 1958, stocks yielded more in dividends than U.S. bonds did in interest, according to data from Yale economist Robert Shiller — exactly what is happening now.

So maybe that's normal, and the past five decades were the aberration.

People who think the market will snap back to normal are underestimating how much the Great Recession scared investors, says Ulrike Malmendier, an economist who has studied the effect of the Great Depression on attitudes toward stocks.

She says people are ignoring something called the "experience effect," or the tendency to place great weight on what you most recently went through in deciding how much financial risk to take, even if it runs counter to logic. Extrapolating from her research on "Depression Babies," the title of a 2010 paper she co-wrote, she says many young investors won't fully embrace stocks again for another two decades.

 

Comments

OMG.LOL.WT_

Buy Low, Sell High.

Centauri

"You have to trust your government. You have to trust other governments. You have to trust Wall Street," says Neitlich, 47. "And I don't trust any of these."

Very true statement. Also don't trust the financial statements of many companies. Those statements lack truthful information or contain false information.

2cents

LOL, had some retirement in Worldcom, POOF!
They cooked the books, how would anyone know?

kURTje

Hey Andy - Walnut Securities. So far I've dodged much. Yes I've had a slight steady increase too. Buy stocks you believe in. Don't invest more than you can afford to lose. Sound right? Tata & Auto Zone have been steady also. Sadly devloping 3rd world countries seem to be going fwd. Good luck to you.

Fromthe419

The Yen is racing toward zero, with the Fiscal Cliff and the Debt Ceiling debate coming, I'm going out of paper and putting my money in commodities. I'll take a short term hit and go with something that has intrinsic value. Central Bankers hate commodities because they retain value, fiat currency has no value and depreciates by at least 2 percent per year. For those that do not follow monetary policy do a google search on Nixon Shock in 1971, it is a brief history of how the dollar lost it's link to the gold standard and when inflation and budget deficits began to cripple our country. Anyone remember the long gas lines in the early 70's? It was not about a shortage of oil, but the method of payment to oil rich nations. The Petrodollar, a barrel of oil based on the dollar linked to gold at $35 per ounce. Look at the current situation, gold is 1650 plus and on some days more, We are no longer a super power (at least economically), When Nixon backed out of the Bretton Woods agreement and took us off the gold standard he basically doomed all future generations of living the American Dream. We never should have had the prosperity we had for the last 40 years, we were borrowing to have the American dream and putting it on the backs of our children and grandchildren. If you want a better life for your children and grandchildren, there will have to be reform on unfunded liabilities, you may not like it (I don't) but I certainly want my children to have a better life than I had and if there is no solution to our current situation, they are going to have far less opportunities than we had and their standard of living will be far less than those in Soviet Bloc nations in the late 80's. Ok, off to bed, I said my piece.

The Hero Zone's picture
The Hero Zone

For many of these same reasons, this is why "Crowd Sourcing" sites such as Kickstarter.com are becoming increasingly popular. It isn't without risk per-se, but it has become a huge and popular way for future and current businesses to raise capital. Not just businesses in a stereotypical sense but sole or partnered entrepreneurs and artists looking to give their idea a shot in the arm when perhaps other lending institutions won't back it or used to supplement other sources of money. I have considered this option for several projects as, especially in the economic times we are in, loans are a difficult thing for which to qualify. Add to that the rather unknown or stigmatized nature of the sub-pop culture we serve and this allows us to really hit a global and passionate niche of those who want to see success when it comes to the people, products, or lifestyles they enjoy.

If you go to the Kickstarter site you can even filter it down to people in your area or state. That way you know your money is going to support an Ohio/US/other project. If any of you have a great idea you've always wanted to pursue, you should really check it out!

Contango

Outa equities? Where ya gonna go for growth; bonds?

"The Bernank" has been helping to pump up equities. The Total Mkt. Stock Fund (VTSAX) of which I'm largely invested is up 15.7% YTD.

Many have been seeking shelter in bonds, driving up prices and we're brewin' for an eventual decline. Interest rates ain't gonna stay flat forever.

It's estimated that investors lost billions by not being in equities:

http://www.bloomberg.com/news/20...

Watch where the small or retail investors puts their money and then more often than not - do the opposite.

http://www.ici.org/research/stat...

Factitious

"...investors lost billions by not being in equities"

Um, yes, and at other times they lost billions by NOT not being in equities.

When I get ahead, it's because I was smart. When I lose, it's because I was unlucky.

How much return does one expect when interest rates are so low? Don't expect too much, unless you can afford a lot of risk.

Risk is the best investment, especially when you can find the best market failures before it's too late. High-risk invesnments pay a disproportionately higher return than low-rick investments.

Invest in all the risk you can afford.

Only the weathy can afford much risk, so, all other things being equal, they get ahead faster. Plus they can pay off Congress for preferential tax treatment, so their large incomes are taxed at a lower rate than those who bend their backs for a living.

See how it works?

Contango

No, "how it works" is: Don't fight the Fed.