Special Feature
It seems that US households in particular were too scarred by three major bear markets since the turn of the millennium and many have parked their retirement money into supposed “safer” places like Treasuries. Not even the expansionary monetary policy unfolded by “Helicopter” Ben Bernanke has been able to push mainstream US retails investors out of bonds and bank deposits back to the equity markets. According to Bloomberg data for 401(k) and IRA mutual funds, the proportion of assets invested in stocks is just 72% and has decreased a little since 2009. It seems this strong bull market has completely passed retail investors by and they likely feel they have missed the boat. The percentage of households owning stock mutual funds has also been dropping and is now at the second lowest since 1997. In 2000, just before the tech bubble burst, 90% of mutual fund assets were composed of equities. Do you see a common pattern here? Mainstream investors ALWAYS invest precisely at the wrong moment.
“The percentage of households owning stock mutual funds has also been dropping and is now at the second lowest since 1997.” The GFC was different Unlike many other financial crises, the GFC has proved a resilient and long-lasting one. Even though the equity market has recovered and doubled its valuation between 2009 and 2012, many economic variables still point to moribund growth in Europe in particular and so the bare “headlines” contribute to a lack of confidence. The complete failure of the financial system leading to the once unthinkable bankruptcy of companies like Fannie Mae, Bear Sterns & Lehman Bros has, it seems, hit retail confidence in a way not seen in a generation. With confidence low and depressed incomes, many prefer to be out of the stock market.
We should also consider the harsh conditions experienced in the markets in recent years. Volatility in 2008-09 reached epic proportions and it has sporadically shot higher again on the Sovereign debt woes as well as the “flash crash” in 2010. These daily swings of up to 10% continue to bang the nail in the coffin for retail investor participation. Indeed, August 2011 was the worst August for the last 20 years. Performance was awful while volatility was huge — a killer blow to most investors. Just when confidence appears to be recovering it seems there is always an event that strikes again and scares people out of the equity market.
The Future With markets back to near 2007 peaks, it is legitimate to now ask: so what next? Is it still time to invest? The US economy has been recovering in recent months with the help of the FED and some fiscal stimulus and it seems it will continue on this trend through 2013. Ditto with China and Asia. The first quarter will be another scary one for investors however as the warring US political parties — the Republicans and the Democrats —square up once again over their domestic US national debt and its limit that is about to breached. A deal will be needed to address this otherwise the US Government will default on its payments. The fiscal cliff debacle has just really been delayed and new solutions will need to be found before the end of March. Corporate America is however sitting on a cash pile of over a trillion dollars as companies just don’t know what to do with their excess cash flows. Even with equities back to near all time highs, many stocks are still undervalued, but it seems that until wider macroeconomic confidence returns they won’t attract the average American. The irony is of course that right throughout history it has been shown that when the sky looks blue and mainstream investor participation is high that this is precisely the point when the “clever” money should be bailing out...
26 | www.financial-spread-betting.com | February 2013