Main street hates stocks.

That is according to today’s front page of USA Today: The print edition had a center column, above the fold, screaming green headline “Invest in stocks? FORGET ABOUT IT.” That Cap and Bold headline is as it was in original. (The online version was the tamer Invest in stocks? Small players still smarting).

It may surprise some people to learn this is both an expected and positive development. It implies eventual lower prices (over the intermediate term), but will also help to create that elusive lasting market bottom, as I will explain in a moment.

First, an excerpt:

“On Main Street these days, investing in the stock market is about as popular as watching a scary movie on a 12-inch black-and-white TV.

Wall Street’s long-running story about how stocks are the best way to build wealth seems tired, dated and less believable to many individual investors. Playing the market isn’t as sexy as it used to be. Since the 2008-09 financial crisis, the buy-now mentality has been replaced by a get-me-out, wait-and-see, bonds-are-safer line of thinking.

Stocks remain out of fashion even though the stock market has risen more than 100% since the bear market ended three years ago. It’s up 25% since October and 9% this year.”

This is no surprise — between the run of scandals in the 1990s and 2000s, the dot com implosion, analyst scandal, the 2007-09 crash, housing collapse, the flash crash, and HFT, mom and pop have taken their ball and gone home.

This is how bear markets eventually end.

Most people misunderstand what drives secular bull and bear markets, focusing on prices alone as the defining characteristics. I believe this is in error, or at very least paints an incomplete picture.

Whenever I give a market presentation at a conference, I always use the chart below. It explains in great deal how Main Street investor psychology impacts the long secular cycles of bull (green) and bear (red) markets. Note the metric at bottom, which is P/E ratio.

My definition of a Secular Bull Market: An extended period of time, typically lasting 10-20 years, driven by broad economic shifts that create an environment conducive to increasing corporate revenue and earnings. Its most dominant feature is the increasing willingness of investors to pay more and more for a dollar of earnings.

You can see this in the 1982-2000 secular bull market. Total returns were driven partly by earnings improvements, but far more by multiple expansion. This is essentially a psychological component.

A Secular Bear Market reflects the opposite: Following an extended secular bull, it is a period of time marked by increased volatility, frequent cyclical rallies and corrections, in an economically challenging environment. The dominant feature is that Investors are willing to pay less and less for that same dollar of earnings.

We see that today. Profits going up as volumes go down; investor interest ebbs and fades. Its how markets can go sideways or even rally and still see P/E ratios fall.

Ultimately, when the process generates enough investor disgust, we can form a lasting market low, typically, in the Single digit P/E ratios.

(The caveat is we don’t know how unprecedented Fed printing affects this psychological process).


click for ginormous chart

Original chart, Crestmont Research (annotations added)

Invest in stocks? Small players still smarting
Adam Shell
USAToday, May 8, 2012

Category: Investing, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “Invest in stocks? FORGET ABOUT IT”

  1. Savage1701 says:

    “(The caveat is we don’t know how unprecedented Fed printing affects this psychological process).”

    Yes, that’s a BIG caveat, no sarcasm intended, given its magnitude, duration, potential further (ab)use, and lack of knowledge of the totality of its consequences, intended or otherwise.

  2. mathman says:

    or the original

    (from the top link)
    “The piece helps dispel the myth that climate scientists have long been overhyping climate impacts — when everyone who actually follows climate science and talks to any significant number of climate scientists knows that the reverse is true. As Blakemore writes:

    Established scientists, community and government leaders and journalists, as they describe the disruptions, suffering and destruction that manmade global warming is already producing, with far worse in the offing if humanity doesn’t somehow control it, are starting to allow themselves publicly to use terms like “calamity,” “catastrophe”, and “risk to the collective civilization”….

    A few years ago, this reporter heard a prominent climate and environment scientist speaking at a large but off-the-record conference of experts and policy makers from around the world who had gathered at Harvard University’s Kennedy School….

    He told us that he and most other climate scientists often simply didn’t want to speak openly about what they were learning about how disruptive and frightening the changes of manmade global warming were clearly going to be for “fear of paralyzing the public.”

    That speaker now has an influential job in the Obama administration.

    Climate scientists have been consistently downplaying and underestimating the risks for three main reasons. First, their models tended to ignore the myriad amplifying carbon cycle feedbacks that we now know are kicking in (such as the defrosting tundra).

    Second, they never imagined that the nations of the world would completely ignored their warnings, that we would knowingly choose catastrophe. So until recently they hardly ever seriously considered or modeled the do-nothing scenario, which is a tripling (820 ppm) or quadrupling (1100 ppm) of preindustrial levels of carbon dioxide over the next hundred years or so. In the last 2 or 3 years, however, the literature in this area has exploded and the picture it paints is not pretty (see “An Illustrated Guide to the Science of Global Warming Impacts: How We Know Inaction Is the Gravest Threat Humanity Faces“).

    Third, as Blakemore (and others) have noted, the overwhelming majority of climate scientists are generally reticent and cautious in stating results — all the more so in this case out of the mistaken fear that an accurate diagnosis would somehow make action less likely. Yes, it’d be like a doctor telling a two-pack-a-day patient with early-stage emphysema that their cough is really not that big a deal, but would they please quit smoking anyway. We live in a world, however, where anyone who tries to explain what the science suggests is likely to happen if we keep doing nothing is attacked as an alarmist by conservatives, disinformers, and their enablers in the media.”

  3. b_thunder says:

    Brilliant caveat about the Fed at the very end of the post.

    IMHO, the most important condition for the lasting market bottom is complete and total removal of the Fed and other non-market forces from the markets, and the explicit promise not to intervene in the future. As long as Fed and other CBs are regular players in the markets (and they happen to be by far the largest price moving entities) there can be no real price discovery and therefore can be no lasting market bottom.

  4. The caveat is we don’t know how unprecedented Fed printing affects this psychological process..

    no kidding.

    speaking of caveats, ‘We’ missed one, a while back..

    “…there’s the signpost up ahead. Your next stop: The Twilight Zone.”

  5. gman says:

    All of the charts/valuations look like there could be ONE more flush down 20-30% give the lemmings one more chance to puke/ say “i m glad im not in the mkt”. That would push valuations to secular bear ending levels!

  6. dead hobo says:

    BR wondered:

    Ultimately, when the process generates enough investor disgust, we can form a lasting market low, typically, in the Single digit P/E ratios. (The caveat is we don’t know how unprecedented Fed printing affects this psychological process).

    First, good observation about market bottom thinking. The public adds and withdraws liquidity from the markets. Right now, I would suspect the percentage of cash flowing into stocks from ma and pa is negligible compared to 5 years ago. Stability will bring them back. This will add liquidity and, as a result, pump up stock prices.

    Second, the Fed is a provider of liquidity and stability. If the Fed were to withdraw liquidity while the public added the same amount of liquidity, this would be at best a wash, and at worst create a fall due to additional liquidity by funds being removed due to uncertainty.

    What I am finding utterly surprising and fascinating is that so many pros still think the stock market is a mystical place where shit just happens. I suppose a gullible public helps sell books and other services. A fool and his money are easily parted. Claiming special rare expertise with respect to understanding the world situation just helps look exclusive.

    Look, market levels are a function of liquidity. Withdraw it due to massive margin calls, massive bank runs, or central bank removal and equities fall. It’s not any more complicated than that. Add liquidity and prices rise. QE1, QE2, LTRO 1, and LTRO 2 are examples of injections that ultimately bolstered prices. The Great Recession, where huge investment banks fell, created fear and massive bank runs that removed liquidity. Equity prices fell. Ditto last year in Europe. Prices fell when cash was hoarded. Prices stabilized and rose when central banks added liquidity.

    It’s not magic. It’s just liquidity. Market volume and the velocity of money also play major effects, but liquidity is king. There’s nothing complicated about it.

  7. Randel says:

    Excellent Post and Informative.

    Due to the caveat, the ultimate bottom is formed when the Fed says “we are starting to raise interest rates” because then the higher rates will kill the bond market, the stock market will dive, housing will further dive as financing goes up making home more expensive, the dollar firms, and gold and silver get pushed back to jewelry status. This is some time off, but this “recession” scenario once it plays out, will be the bottom IMHO. You may wonder when the Fed will get to that point. Well stuff, cars, appliances, material crap eventually wears out and a slow pent up demand is formed out there. Look to 1945+ to see that in action. We are still in secular Bear territory. Good work Barry.

  8. rd says:

    On top of the Fed caveat, there is another one. Most of the small investor players in the stock market in the 90s and 2000s are now in their late 50s and 60s. It is unlikely they are looking to move back to 90% equities in the near future which is where they were 12 years ago.

    There was an interesting article over the weekend about the reduced interest by Gen X and Y in putting money away in IRAs:,0,4072382.story

    Polling by T Rowe Price said that only 45% were planning on putting money into an IRA this year. 71% did so last year. The secular bear is unlikely to end until this generation steps in to the batter’s box. Most are also not putting away anything close to 15% into their 401ks while their companies have eliminated pension funds for them.

    It will be tough for them to particpate at a high level given their high uinemployment rate and high student loan debt. They have watched their parents lose their shirts in the housing market and in period major stock bear markets that started in 200 and 2007 – most of their life where they were aware of something other than Saturday morning cartoons and high school sports. Not a great confidence builder.

    I think one of the things that will drive the lows of the next crash will be the inability of margined professional “investors” to dump their equities as the top is forming onto the dumb money due to sheer apathy and fear. I will be surprised if we don’t see a Shiller CAPE low of less than 10 in the next 5 years. That would retest 666.

  9. ConscienceofaConservative says:

    Chris Whalen put out a very intersting piece today on Fraud and it’s affect on the market place comparing MF Global to what we saw after the stock market crash. Add to that “investor spring” aka stock holder revolt curerntly being sen across America and the U.K. My conclusion is that when taken together with high valuations Main Street has taken to boycotting the markets thinking the game is rigged more than ever. I don’t think this ends until our legislatures , regulators and judges take steps to rectify and level the playing field. Othewise it feels more and more like a suckers game.

  10. VennData says:

    Since we don’t know when we would switch from one to the other, really what good does this do us? I think it is a great definition, useful for looking at the past, but as a tool I think since stocks look forward, and many months if not years forward, then knowing the recent history gives us very little understanding of the semi-distant future. Without that knowledge, impossible to have, you cannot know how to change your behavior. You cannot know how to change your asset allocation. Everyone was bearish in early 2009. But if you stuck with your asset allocation, you were re-allocating from bonds to stocks. Same for 2007/8, if you stuck to your asset allocation, you were selling stocks and buying bonds. Asset allocation, Buying, holding and rebalancing worked.

  11. [...] Secular bear markets end amidst apathy not panic.  (Big Picture) [...]

  12. AHodge says:

    started out thinking completely agree
    and still do as far as a shiller type psychological cycle
    but these cycles mostly coincide with the economic cycle
    and this economic cycle is off track for a normal expansion
    not only the fed you cite but all the other financial dysfunction
    so strange to say im more of an optimist
    in the sense that we usually only get sub 10% p/e s at the end of a global recession
    and i am thinking hoping its not as bad as that now?
    its not a pretty trading picture for anyone looking for a trend or macro story
    my best luck recently is range trading treasuries as noted earlier — heading back near their highs again
    but you could have range traded almost anything i guess

  13. machinehead says:

    ‘Whenever I give a market presentation at a conference, I always use the chart below.’

    Your chart would be even more informative if it showed the real (inflation-adjusted) Dow.

    Why were the Seventies called the ‘Hate Market’? A mere 10% decline in the nominal Dow (as shown on the chart) doesn’t begin to explain it. But an almost 75% price decline in real terms, from 995 in Feb. 1966 to an inflation-adjusted 261 in Aug. 1982, certainly does.

    Within the 10% compounded nominal total return on stocks since 1926, fully one-third is the phantom return of inflation. Stocks averaged 6.5% real total return over the 20th century.

    Without correcting for the flaky rubber ruler of the Federal Reserve fiat dollar, the chart is contaminated by noise, and so are some conclusions potentially drawn from it.


    BR: My point is about the broad psychological impact of secular bear markets. Don’t focus on just one (1966-82) instead pay attention to the concept

  14. AHodge says:

    shorting BBVA and UBS also worked –they have options and yu allowed to outright short UBS
    but all my other little longs are losers so far
    basically breaking even

  15. DrSandman says:

    Fascinating thought piece, BR. Kudos.

    You mention trading volume lots. It is something that I choose to ignore as noise because of the pollution by HFT. When we talk about “volume being down” relative to some point in the past, are the artificially-inflated volumes corrected to a baseline since HFT, algo-traders, co-located arb shops (etc.) can’t really count as volume?

  16. Orange14 says:

    So they don’t want to be in the stock market, don’t want to contribute to IRAs, vote for Republicans who want to end Social Security as we know it, and they expect to retire some day?? This is pretty crazy thinking but again not surprising since investing in individual equities requires hard work. I just finished reading “How I Trade and Invest in Stocks and Bonds,” by Richard Wyckoff (can’t remember where the suggestion came from for this book, maybe this site?), written in 1924. Amazing how 90% of it still holds true today. As Ecclesiastes put it so famously, “there is nothing new under the sun.”


    BR: One of our favorites

  17. Moopheus says:

    “This is no surprise — between the run of scandals in the 1990s and 2000s, the dot com implosion, analyst scandal, the 2007-09 crash, housing collapse, the flash crash, and HFT, mom and pop have taken their ball and gone home.

    This is how bear markets eventually end.”

    Really? How many times in the past have those scenarios played out? Is there a historical pattern here?

    After everything we’ve been through in the past twenty years, the takeaway message for Ma and Pa investor is, Wall Street is not working for your benefit. The individual investor is a mark to be fleeced. The institutions of the market are completely corrupt, and government regulators protect them. Why play when you know the game is rigged against you? Restore the rule of law on Wall Street, and maybe the investors will come back.


    BR: How did Wall Street work out for Ma and Pa in the 1920s? The 1907 crash? Nifty fifty in the late 1960s?

  18. Northeaster says:

    I have cash on the sidelines, and I’m hesitant to do two things; A. give me money to someone who “thinks” they can earn, B. do it myself, competing against algorithms. I’m seriously considering buying some PM’s with it and throwing it in the safe, as I have zero confidence in both politicians and “The Market”.

    It’s obviously not helping any, but it’s almost feeling like we’re being “forced” into the market due to it being the least worst environment. I like alternatives, and to me none are looking that great, or is 3%-4% going to be the best we get from here on out, with the possibility of it literally being stolen?

  19. DSS10 says:

    The problem with investing in stocks, bonds, or even commodities is that the basis for any real appreciation or change in income is based on either a government intervention (QE3 for bond and stocks), political instability (the french election and the 30 year (now yielding 3.03!), or regulatory and account policy (Apples use of the dutch sandwich and GE’s corporate tax strategies). Every investment is a derivative now that moves not on its underlying asset but rather indirect factors.

    As Benicio Del Toros character said in the movie The Usual Suspects: “Wadafackizaldizshit” I just want the ability to invest in something that has value is not based on: loop holes, flukes in the tax code, or non replicable events…..

  20. dead hobo says:

    DSS10 Says:
    May 8th, 2012 at 10:50 am

    I just want the ability to invest in something that has value is not based on: loop holes, flukes in the tax code, or non replicable events…..

    This will never happen. Central banks were invented to promote stability (promote, not guarantee). They will always be in there dabbling. Things would be a lot worse without them.

    Re liquidity: today is a great example of stocks falling due to liquidity (not some mysticism about Greece, although I’m sure Greece is motivating a few people to put some cash under the mattress.)

    Oil and gold are in free fall again. Since these were probably bought on margin, there are likely margin calls out the wazoo for people dumb enough to believe that ‘gold is true money’ or “high priced oil is a good thing, so buy as much as you can and make it go even higher.” Margin calls mean assets with real value must be sold to cover a position. By definition, this is a liquidity crisis. It is also a buying opportunity. The only liquidity crises to fear are those that are so big you need a central bank to fix it.

  21. Greg0658 says:

    ebb tides .. bulls gore sheep herds and bears pick at the carcasses .. I get it now .. took just 5 years

  22. mad97123 says:

    It seems Ma & Pa understand in their bones now that an economy based on debt driven spending, whether it’s their debt or govt debt, is not sustainable. If the economy can’t sustain itself long term, why would the stock market sustain itself?

    “It may surprise some people to learn this is both an expected and positive development. It implies eventual lower prices (over the intermediate term), but will also help to create that elusive lasting market bottom, as I will explain in a moment.”

    Lower stock prices are a positive development? Gee, why didn’t Wall Street think of that one earlier,,,,,

  23. [...] we discussed the psychology of longer term cycles this morning, let’s step back see how they look over the long haul, via The Chart [...]

  24. mad97123 says:

    If lower prices ahead are due ahead, did Ma & Pa really miss the Fed rally. All that cash “earning nothing” is an simply an option call on those lower prices.

    Of course the theory goes that Ma & Pa will never know when to deploy that cash, but that assumes they are not thinking. Perhaps they are thinking now, and that’s why they are not willing to be the “greater fool” at these prices.

  25. carleric says:

    I am on the sidelines, sipping beer and smiling at the morons chasing the bull market…until Bennie gets out of the market, discards Alan Greenspan’s tired and failed dictates (that if you juice the market, people will feel better and spend, spend, spend) and comes to the somewhat obvious conclusion that more debt is not the solution for too much debt.I will just keep sipping and smiling. Just in case you aren’t paying attention, its rigged folks, not by the market so much as by governmetnal inteference.

  26. Irwin Fletcher says:

    Good point about focusing on P/E multiples.
    I had been simply focusing on the levels, assuming the P/Es and the levels both fall accordingly.
    Not necessarily. Hadn’t thought about that enough.
    Levels could flatten out as P/Es drift lower. People waiting for “cheap” levels on the S&P
    actually miss out by ignoring single digit P/E multiples.

  27. StudsTerkel says:

    Right on, machinehead.

  28. rd says:

    @Moopheus and others:

    These secular bears tend to actually improve things for the small investors.

    The 1930s created the SEC, FDIC and Glass-Steagall (2 out of 3 currently deregulated or defanged today) which were focused on improving information and reducing fraud.

    The 1970s saw Charles Schwab open a discount brokerage focused on small customers and the creation of the first index funds, both focused on reducing costs and increasing diversification of small investors.

    As a result, we can invest with greater confidence about the information and at lower cost. we wait with bated breath to see what this decade will bring us for improvements. Unfortuantely, I think one of the major improvements need to is to bring back some of the regulatroy innovations from the 1930s, so just re-runs at the moment.

  29. Lugnut says:

    @ Randel

    I would like for someone to make a case for a scenario whereby the Fed could actually raise interest rates. Given the current debt levels (which are only increasing) wouldn’t a rise in the coupon on the 3, 5 and 10 year notes basically blow up our interest payments, as a percentage of the annual Federal budget?

    CBO says current interest payment obligations over the next decade are projected to be over $5 trillion dollars (based on a rise of the rate on a 10 year from 2.3% to 5% over that period) If it goes up by just 1% more than expected, thats another $1 Trillion in interest payments.

    Given that, I’m sure the pressure from COngress and the White House will be not to even allow it to float even that high, given the budget and deficit implications those increase interest on debt payments will presume. Therefore I predict more and moer budget deficits, more ZIRP, more bankrupt pensions, more Keynsian ‘we can’t stop now, the GDP will crash’ pundit pronouncements, more Fed market intervention, a delayed definable ‘bottom’, and lots of sliced up hands.

  30. Sunny129 says:

    ‘bear markets eventually end’

    -When CRONY Capitalism is replaced by FREE Market Capitalism

    - When Institutional fraud and corruptions are NO longer tolerated

    -When FED quits meddling in the market and mis-pricing credit risk to bailout Banksters

    - Rule of law in FIRE industry – especially RE is reestablished.

    - M to FANTASY accounting to be replaced by M to Market in real time, NOT on the basis of a ‘model’ concotion

    Otherwise ‘Pretend and extend’ charade continues, till it becomes no longer responsive .

  31. [...] was the headline on Tuesday on the front page of the USA Today. Typically I would ignore something like this if it was more of a business or finance periodical. [...]

  32. [...] Secular bear markets end amidst apathy not panic.  (Big Picture) [...]

  33. [...] Invest in stocks? Forget About It | The Big Picture USA Today story says Main Street has shunned stocks. Barry Ritholtz calls this the secular bear market’s sign of bottoming. [...]

  34. [...] Previously: Invest in stocks? FORGET ABOUT IT (May 8, [...]

  35. [...] could argue that all of these are signs that we are coming closer to the end of the secular bear market we have been mired in since the start of the new millennium. Secular bear markets happen to be a [...]