Where Have All the Investors Gone?

Anthony Mirhaydari MSN Money February 16, 2012

2/15/2012 5:54 PM ET

By Anthony Mirhaydari, MSN Money

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.

Is buy and hold dead?

This isn't likely to end anytime soon. Here's why -- and how companies can break the cycle with one simple change.

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.)

Anthony Mirhaydari

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:

â— 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.

â— 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.

â— 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.

â— 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.

Continued on the next page. Stocks mentioned include Kimberly-Clark (KMB, news) and Tiffany (TIF, news).

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37CommentsNewestOldestBestWorstControversial 12 xuan en43 minutes ago Are you looking for business partner or wealthy great looking soulmate?so many people are discussing it ------***Ｒich'Ｆriends.Org ***. -------- best platform for dating affluent, successful and beautiful singles ! you don't have to be a millionaire, but you can meet one ,I think everyone needs to meet some miracle ! === Which it makes it no longer a pure investment rather gambling AKA speculation of what comes may. Well 1 on denial so far. You won't lose money until you lose money. Go ahead take risk at your own expense. will invest more conservatively (bonds. etc.) Shredding the middle class made a few rich and generated a short term economic buzz, but in the end, they've killed the goose that lays the golden egg. = 1 1ReportSpamold man 7650 minutes ago

Very few are happy with the government, market or life in general. I can't say I blame them. Some say thru self discipline and hard work they are doing alright but hate a lot of other people that are preventing from having more. Some have tails of misery and woe. When I look out of my world in to the world other people live in it appears to me most folks are complaining, whining, disliking and condemning every one and every thing around them. If they want to change the world they had better get better at fighting and dying then trying to talk some thing to death.

1 0ReportSpamhere today-gone tomorrow4 hours agoUnfortunately, investors are afraid. We have MBA degrees that can't get us jobs, 401ks on the decline, unemployed relatives, neighbors foreclosing, and Politicians doing what they do best... We will invest when things level out. Contrary to what we are told, at $4/gallon, things haven't leveled out. 8 1ReportSpamsilvercc4 hours agoThe stock market is so rigged it's pathetic. They make sure your 401K buys high and sells low, and they get the profits. If we ran a rigged game at home, we would be arrested, tried, and convicted for fraud. But those boys have the politicians in their pocket, the politicians you low brows keep voting in office for the last 30 years. 17 1ReportSpamNevada Gold5 hours agoI hope and pray that our economy is improving but with our level of debt I think we're just kidding ourselves. We might have an upturn that lasts even a couple years but eventually I think the debt will get us. Unless inflation get us first. 11 0ReportSpamJess Gayer (stockisland)5 hours agoThe stock market according the the trading index is long term over bought. A Bear Market is right around the corner, and finally, for once, the little guy is not getting stuck at the top ...good for them ...!!!! Sell, Sell, Sell !!!!!! 7 0ReportSpamBob lyles5 hours agoSUIT, TIE, INVESTMENT,LIE. 5 0ReportSpamTom Hoffman (Paxilated)5 hours agoOne thing the author missed...the more wealth gets concentrated, the more it rests in the hands of those who are wealthy. They don't need to get rich, they are, and will invest more conservatively (bonds. etc.) Shredding the middle class made a few rich and generated a short term economic buzz, but in the end, they've killed the goose that lays the golden egg. 20 0ReportSpamEvernew6 hours agoThe game is rigged in favor of the small % that know how to make money. The masses never learned. That's why there are the few. Buffet has told you for years how to do it. 7 4ReportSpambiker-thug6 hours ago

they are investing in precious metals ( steel and lead )

9 2ReportSpamupperdoper6 hours ago Real investors are those who use their money to to become entrepreneurs. But the big fat cats they extend their big money making schemes end up making more than what their business brings in with the help of wall street's hype and power. Which it makes it no longer a pure investment rather gambling AKA speculation of what comes may. Well 1 on denial so far. You won't lose money until you lose money. Go ahead take risk at your own expense. 3 5ReportSpamLittle Gypsy6 hours ago

I hate taxes. That said I would impose a ten per cent tax on all short sales. I would impose a 1% tax on all stock trades. I would impose a 5% tax on sales of 1,000 or more shares. All of this tax money could only be used for one thing. Reducing the national debt. Short stocks...pay for it. Trade with supercomputers...you pay for it.

Savers should get two per cent less than the current rate for a thirty year house loan.

My meager CDs are earning less than inflation. I am not going to have enough to live on when I retire. I have been unemployed for three years. No one is hiring people close to sixty. As my CDs mature I cash them out and spend them. The banks won't have to worry about cheating me much longer. The stock market is a joke. It looks like I will be eating whatever I grow.

17 2ReportSpamKeyser Söze 096 hours ago

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.

31 1ReportSpamCrocodile-Mick6 hours agoJust like Elvis, Mom and Pop investor have left the building. Just like Elvis, they won't be coming back any time soon. This same scene played out after the great depression as the stock market lost a whole generation of suckers. 26 0ReportSpamSteven6 hours agoWhat a joke Wall Street is now. Where are all of the investors? Let's see, you took our jobs, our houses and all of our savings. I have nothing left for you guys to steal. Government and Big Business are the same thing in America. There is no one looking out for the shrinking middle class. I have a large tax bill that I have to pay so I will just mail it in and watch california cut more education for taxpayers but send illegal aliens to college for free. Big oil will buy this election for the republicans and we will have another George W. to deal with in the next 4 years. The economic mess is not Obama's fault alone. I knew that a Democrat would win but they would have all of this criticism heaped upon them from the right. I used to be a Republican but I see said the blind man. I am a retired Navy Vet, fought in Desert Shield and Desert Storm. I'm embarrassed to say that I helped protect these thieves. I haven't got anything anymore. I got P.T.S.D. for free and no help to cope with it because I can't pay the co-pays. So I got divorced, lost my children and am broke. What's left? Time for a totally new government. NO MORE business as usual. 47 8ReportSpamretiredwonk7 hours ago

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.

24 1ReportSpamfrustrate trader7 hours agoGood Article Anthony. You touched on many topics, all of which contribute to declining volume. As a personal example; In 2008 our office had 140 equity traders, today we have less than 30. HFT programs have taken their toll on the average day trader. They represent no real supply or demand in the market place and distort prices. The speed they fleece the market with is amazing. I am very worried that we could see a similar event to the flash crash. If large sell volume was sent to the market in a small time frame the robots will pull their bids and the market will cascade lower. Truly said that computers and machines rule the marketplace. 15 3ReportSpamThomas (anon999)7 hours ago

I laugh my azz off listening to CNBC financial pundits. Those morons can go straight to hell.

They are almost as bad as FOX & MSNBC political pundits.

Get used to it people. There is a wealth of pain ahead for the US.

19 4ReportSpamJerome Yap (RomeRome12345)7 hours agoThat's why the workplace is full of 60 plus age workers instead of 30's and 40's. If the don't play the stock market they will never get ahead. There are so many ways to play it it's ridiculously amazing, fun and good way to make a profit. Study, study and study before you dive in. 8 25ReportSpamthumprr8 hours agoRestore their trust, you have got to be kidding. These people have destroyed any trust that may have ever been there. The big boys are playing with money given to them by the fed at zero percent interest rate, while the little guy is just trying to scrape by after being screwed by the mortgage fiasco and unemployment, and the government with little or no interest on their savings. Funny how not one of them is in jail, but they sure have gotten richer. The stock market is nothing more a tool for the rich to fleece the poor. 66 6ReportSpam12 Add a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment?/**/ DATA PROVIDERS

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