It's been more than three years since the market bottomed, yet individual investors remain extremely wary of the stock market and clearly there's a lot of good reasons why:
- The 2008 credit crisis and 2000 bursting of the tech bubble scarred a generation of investors, some irreparably.
- The "Flash Crash" of May 2010 spooked many investors who feel the market is rigged, or at least manipulated by high-frequency computer trading.
- High unemployment, stagnant wages and the bursting of the housing bubble have left millions of Americans with little or no funds to put in the market, even if they were so inclined. In 2011, 46.4% of U.S. households owned stocks, down from 59.4% in 2001, according to USA Today.
- Government bailouts of Wall Street and the Fed's ongoing zero interest rate policy have eroded investors' faith in the market and the sustainability of any rally.
- Lack of faith in policymakers here and abroad, especially Europe, has many investors braced for another market meltdown.
Add it up and many investors would prefer to keep their assets in cash or the presumed safety of the bond market. Since the end of 2008, more than $260 billion have been pulled from U.S. equity mutual funds while $800 billion have gone into bond funds, USA Today reports, citing data from the Investment Company Institute.
Such skepticism seems prudent on days like Tuesday, when the Dow (DJI) fell nearly 200 points intraday before recouping some lost ground, ending down a relatively modest 77 points at 12,931. Stocks were heading lower again Wednesday morning amid renewed concern about the latest upheaval in Europe, where Spanish debt yields are surging and German officials are giving Greece ultimatums to shape up or ship out of the eurozone.
Historically speaking, investors disdain stocks at the bottom, not at the top, as I discuss in the accompanying video with Rick Newman, chief business correspondent at U.S. News & World Report and author of Rebounders.
That's not a market call or prognostication; but the lack of enthusiasm for stocks, especially among retail investors, is a bullish sign from a contrarian standpoint. Relative to Treasury yields, which hit 3-month lows on Tuesday and were falling again early Wednesday, stocks are historically attractive, if not downright cheap.
"Mom and pop have taken their ball and gone home: This is how bear markets eventually end," writes Barry Ritholtz, who notes multiple expansion (rising P/E ratios) are big drivers of secular bull markets. "This is essentially a psychological component."
Gauging when psychology will turn or what will trigger renewed ardor for stocks is impossible to predict. But statistical and anecdotal evidence suggests investor sentiment can't get a whole lot worse, which is historically a good time for true long-term investment.