Lots of folks are wondering where the retail investor has gone. There is some instructive “thinking out loud” as to what is going on: Why there is such light volume, why has financial television ratings plummeted, why has America fallen out of love with equities.

The short answer is that there is no single answer. It is complex, and not subject to single variable analysis. This annoys pundits who like to reduce complex and nuanced issues to easily digestible sound bites. Television is not particularly good at subtlety, hence these silly single factor bull bear debates.

We can easily put together a listicle of the top 10 reasons why investors are unenthused about the stock market. These are what I suspect has been driving the average investor away:

Secular Cycle: There are long term cycles of alternating bull and bear markets. The current bear market that began in March 2000 has provided lots of ups and downs but no lasting gains. Markets are effectively unchanged since 1999. The way secular bear markets end is with investors ignoring stocks, enormous P/E multiple compression, and bargains galore. Bill Gross and his Death of the Cult of Equities is a good sign we are  getting closer to the final denouement; we are not there yet, but getting closer.

Psychology: Speaking of which, investors are both scarred and scared. They have been scarred by the 57% crash, and scared to get back into equities. While this is a necessary part of working towards the end of a secular bear, its no fun for them – or anyone who trades or invests for a living.

Risk On/Risk Off: Let’s be honest – the fundamentals have been utterly trumped by unprecedented Central Bank intervention. While this may be helping the wounded bank sector, its not doing much for longer-term investors in either fixed income or equities. When investors can longer fashion a thesis other than “Buy when the Fed rolls out the latest bailout,” it takes a toll on psychology, and scares investors away.

Poor Returns Across All Asset Classes: Investors have been burned by a series of booms & busts: Dotcom stocks (2000), real estate (2006- ?), equities (2008-09) Gold (2011-12). Perhaps after these experiences, too many Investors have decided that investing isn’t such a great deal after all.

Deleveraging: The marginal buyer is out of the market as they de-leverage their excess credit consumption. An entire cohort of investors is no longer playing with equities. Indeed, they are priced out of all investment options as they rebuild their personal balance sheets.

Wall Street Scandals, part I: First the market gets blown up by bankers, then Wall Street gets rescued. Meantime, Main Street gets nothing. If you don’t think the credit crisis and Great Recession has moved people to stay away from the casino, you are kidding yourself. The people who believe the game is rigged aren’t conspiracy nuts, they are merely observing appearances. At the very least it appears that bankers have corrupted the political process for their own gains.

Trendless Economy & Markets: The soft economy does not get investors fired up about putting risk capital to work. And a range-bound market simply makes trading too challenging for most participants. Paying fees for zero returns as we saw in 2011 isn’t encouraging either.

 Wall Street Scandals, part II: MF Global, Peregrine Financial, Knight Trading, Standard Charter and JPMorgan – another set of factors that are convincing investors to stay away. Theft and incompetency appear rampant, ethical transgressions seem to be part of ordinary business. This has led some people to ask why on Earth they should trust their hard earned money to those guys? No prosecution looks like that much more corruption.

High Frequency Trading (HFT): Investing is a zero sum game. Its not that complex for some people to figure out they are being ripped off by the Exchanges and the HFTs. Front running was once a crime, and know its part of the capital markets basic structure.

ETFs: Some people seem to have wised up to the Stock picking game. Its certainly fun while its working during rampaging bull markets, when correlations go to 1 then it is no longer doable or fun. Add to that the advantages of lower costs, fees, taxes and turnovers, and the traditional stock-picking approach looks like a fool’s errand (yes, I’m talking my book here).

I post this list not because I believe they are all factually correct — although there is much truth in them — but because these are the reasons why many investors have voted with their feet.

What will bring this long bear cycle to its  end? Nothing other than the passage of time . . .

Category: Bailouts, Cycles, Investing, Psychology, Trading

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.

26 Responses to “What is Driving Investors? Hint: Many Things”

  1. dead hobo says:

    I bailed a couple of months ago. At that time, it looked like Europe was about to end. While today this kind of observation is about as controversial as “when’s lunch?”, I still take that sort of thing seriously when my life savings is at risk. Had I waited, by today about 2/3 of my losses would have been recovered. That being said, Europe is still a basket case and still makes the world look dangerous for financial risk of personal assets. Waiting it out would have been idiotic.

    Professional money managers of the TV pundit variety who earn their living by charging a percentage of invested assets mostly appeared to hold firm. Game theory told them they had the most to lose if they sold and were wrong. Holding, being wrong, and causing a loss of OPM is acceptable to Wall Street because the excuse machine is geared towards ‘explaining’ the heroics involved in standing pat. ‘Nobody could have seen that coming’ or ‘You hold a lot of dividend stocks’, or “we still beat our benchmark’, or ‘Give me more cash to buy the dip’ all keep the commissions on invested assets rolling in. Buy and hold is alive and well with professional money managers. At least, the ones who show up on business TV.

    HFT oriented stock markets that can take a little real money, bat it around at light speed, and make it look like a lot of new cash is bidding up stocks just scares me. Especially when it happens big time on days with no news, bad news, or news taken out of context. These big jumps just look orchestrated.

    Then you have central bankers who want to print money as the fix to all ills. Never mind that will cause the price of commodities to explode and crush the recovery the free money was intended to fix. Only wall street will benefit. Main Street here and abroad will probably complete the descent into recession. All from central banker generosity.

    I’m all cash and will remain all cash until I see at least a few months clarity, Greece looks settled, and Europe stops trying to extort Germany for handouts. I also want to see the risk of someday soon needing to recapitalize the ECB removed. Since Greece going under will create this need, I suspect some grand gesture will ‘save’ Greece once again for a little while. Bailouts will continue. Europe is still ultimately toast.

    I’m also spending a lot less and planning cheaper vacations closer to home. I can’t help but wonder about what kind of new bullshit play one or more central banks will pull just to pander to the worst elements of finance, as the unintended effect will probably cause a larger economic slowdown somewhere.

  2. coleyc says:

    You forgot as more people are taking longer periods of time to find work they are selling stocks to survive. Tough to find this number but it can’t be small.


    BR: That would be under “Trendless Economy & Markets” — also, yesterdays Employment chart had something relelvsnat to that

  3. Jim67545 says:

    I wonder how much of this is demographic. Baby Boomers have their own holdings and whatever is coming to them from their fast disappearing parents. Two generations of wealth building during “good times” are concentrating in the hands of folks just into or fast approaching retirement. This is not an inherently risk taking demographic and is one focused on income and return of capital. Also, for those Boomers still working, with IRAs and 401(k)s, these folks would tend to select either quite conservative options or perhaps targeted date investments which are asset allocating toward government bonds.

    Then look at the two generations behind the Boomers. The next one back has been affected by stagnant incomes, the housing crash, peak earnings age unemployment and deleveraging (rather than saving). The one back from there by high student loans, weak job prospects, delayed family formation, etc.

    I realize that these are huge generalities but at least it is a factor which may deserve to be considered for the 10 mentioned.

  4. crutcher says:

    “Dotcom stocks (2000), real estate (2006- ?), equities (2008-09) Gold (2011-12).”

    Here we have your pet dislike for gold clouding your analysis. Compared with tech and real estate, gold is a microscopic part of the equity world, having virtually no impact on wider retail sentiment. In the 2000-present bear market time-frame you delineate gold equity investors have done exceptionally well.


    BR: I was referencing a series of fails, not the 2000 – present period. While Gold is the mildest on the list, people who paid up for Gold ($1900) and have watched it go nowhere for more than a year or lost 20% or so.

    PS: I have some Gold exposure via First Eagle, and publicly recomended GLD in the $40s.

  5. Iamthe50percent says:

    Dead Hobo, I hear you. Still, I own a few European stocks, Volkswagen, Royal Dutch Shell, and AstraZeneca. These are International stocks not tied to Europe, paying good dividends with growing earnings. I was in cash, but as a semi-retiree who is not a millionaire, I can’t live on a 0.1% money market return. As for waiting, I would remind you (as I think Barry is) that picking the bottom is just as hard as picking the top.

    Glad you can afford vacations, a lot of small businesses depend on you. My vacation was sitting at home (I still own it! And my mortgage is now 4.25%!), turning up the A/C against the ungodly 100 degree temperature, and surfing the net. At least it beat getting up at 4:00AM to drive to the postal hell hole I work in to service machinery while trying to not faint from the heat.

  6. David in D says:

    Good thought-provoking post… I was just getting ready to say something similar to what Jim67454 articulated. Basically, that younger generations who (historically) would have replaced those who are getting out of the market due to true retirement, are often under-employed and indebted with significant student debt.

  7. rickf says:

    How about the fact that the ‘retail’ investor who pulled money out in ’08/’09 doesn’t “buy” into this funny-money induced ‘rally’ since then? IE, they’re waiting for the market’s supply of euphoria-inducing drugs (ie QE, CB antics) to be cut off and reality to set in before re-entering the market to any significant degree? I’m sitting on 25% cash in my longterm account and have no desire to put it to work at these levels … certainly not while the market ‘reality’ is QE-based and not reflective of the “actual” reality of things. Indeed, markets are irrational, but now moreso than usual.

    On a side note, HFT-related incidents do NOTHING to encourage little folks to invest for the long term. Those algos need to be relegated to dark pools only (I’d call it a kiddie pool, seeing how some of these bots are designed *cough* Knight) and leave the public market for serious investors who are in it for the LONG haul as opposed to intra-second trading only.

  8. Liquidity Trader says:

    Nice listicle, but its unfair of you to use logic and reasoning when all of your peers are running around using buzz words and sound bites.

    Guess you don’t want to do TV any more.

  9. Rightline says:

    so true….

  10. stick14 says:

    I would like to add one to the list. The election year cycle.

    I find it very interesting how folks now define RISK. In the late 90s, an investor’s biggest risk was missing the next 20% move in the .com stock du jour. In 2006, it was missing the next 50% move in real estate. Now, its owning stocks during the next 10% correction. Too many investors forget that beating inflation over the next 10, 20, 30 years is the biggest risk they have, not losing a few bucks over the next month or two. We continue to see huge flows into bonds even though prices are at all-time highs. And with the 10 year at about 1.5%, there is ZERO chance investors keep up with inflation throughout retirement if they over-own bonds.

    I am sure investors will pour back into stocks as soon as the “fiscal cliff” is behind us, the US economy seems to be on firmer footing, Europe is “fixed”, etc., etc. Just in time to create the next top… LONG LIVE THE HERD!

  11. farfetched says:

    When asked by Matt Miller last night on Bloomberg what was keeping investors out of the market the guest answered, “definitely maybe Europe”. “Definitely maybe?”

    Then we have Mark Zandy from the jokesters at Moody’s (could they have a better name?) answering Betty Liu that employment is down because of “uncertainty” in the markets, to which Betty (God bless her) asked, “Do you have hard data to indicate that?”. Zandy, who was now was caught with his dick in his zipper, said, “uh, well no.”
    So to the carnival atmosphere that is the casino on Wall Street that is repelling retail investors I would add: IDIOTS on financial infotainment TV. It doesn’t help that Bloomberg fills the schedule with morons. Berry excluded of course. It’s the one respite from idiocy.

    AAMOF, I would bet that retail investors are in Vegas. The drinks are free, the rooms and meals cheap, the odds are better and there is some form of regulation.

  12. thetruthseeker says:

    Get outside the bubble of New York City and you will realize the answer. It is very simple. People do not trust Wall Street or the stock markets anymore. They have seen the manipulations, they have seen the bailouts, they have seen people commit crimes with no repercussions, and quite frankly they are tired of it. There is no magic law that says individuals must have a certain allocation to equities. All the Wall Street propaganda which claims low retail investor participation is bullish is simply propaganda. There have been many long periods where overall retail participation in the markets has been low. We just might be entering one of these periods again. The only thing that will change this level of participation will be restoring trust to the system. The only way that this happens is a return to the rule of law. As long as you have firms like JP Morgan ignoring subpoenas (i.e. the current PFG fiasco), people like Jon Corzine getting off scot-free, and the continuing Fed manipulation of interest rates and financial markets, then the people will not return. This is one of the major failings of central planning. It is a major failing of the hubris of the Ivy League/Ivory Tower contingent. That while all their white papers and academic theories tell them people should be in the markets and out taking new loans because interest rates are low, human beings, flawed though they might be, still seeks to protect themselves when they encounter rampant criminality. People can only be lied to and manipulated for so long before they actually begin to act somewhat rationally by trying to protect themselves the best way they know how: namely, opting out of what they believe to be a system that is out to get them.

  13. Concerned Neighbour says:

    I am a retail investor, and “Risk On/Risk Off” is the primary reason I won’t trust my savings to equities. Contrary to my posts on this site, I’m not a “perma-doomer”. I was 100% out of equities when the crash hit, but did start buying when the S&P hit 900. I sold around 1,100, and have sat amazed as world central banks have proceeded to inflate more bubbles. I see no moral hazard in this market; it’s as if the Bernanke put is now 2,000 on the S&P (it wouldn’t surprise me if that where he’s taking us). I see fair value for the S&P between 900-1,000, but of course that will never happen as long as central banks continue to be so stupefyingly reckless.

  14. [...] What is Driving Investors? Many Things  (The Big Picture) [...]

  15. rimzolito says:

    I am probably confused, but I thought futures trading was a zero sum game and since investing allows you to capture dividends it is not a zero sum game.

    Please stop throwing in these slants at HFT without exploring the other side of the argument. At least put an article up featuring the other side?! please….

  16. warren.buffett says:

    Investing is not a zero-sum game

  17. deanscamaro says:

    It might be assumed in one of the above, but better regulation on derivatives, HFT, etc. has a basic assumption that somebody has to create/enforce those regulations (plus the ones already in existence) and that points the finger at Congress/The President…….who are not trusted by anyone. Frustration of investors has grown because they don’t have anyone to turn to to fix obvious problems. All the mechanics needed to fix the system are paid to stay home.

  18. [...] No one thing drives investors.  (Big Picture) [...]

  19. digistar says:


    All of our systems (stock market, banking, government, Federal Reserve) are broken, corrupted or both.

    Can the little guys get suckered back into the stock market?

    Not this one.

    Right now, survival is the name of the game.

  20. farfetched says:

    I think the ‘Near Miss’ story from yesterday covers most, if not all of the reasons retail investors are out.
    The overall risk and risk control for just about all endeavors is broken.

    From RE, derivatives, the Fed, flash crashes, cruise ships, air traffic control, Knight Capital, name it…..our ability to observe, quantify and control risk appears to be nonexistent. It’s the C word.

    There is ZERO confidence in our system right now.

  21. carleric says:

    The entire market – equities, futures, derivatives, etc. – are driven by the “drunken” algorithmic driven traders who just push buttons on their computers seeking out the latest momentum driven action. If anyone can find any connection between markets and economic reality please advice. Until that happens it is either time to have a cold beer at the lake, wet a fishing line or go to the track where you have a fighting chance. When some dufus offered a rationale for HFT, Joe Saluzzie of Themis Trading remarked “Please stop pissing on my shoes and telling me its raining” I am with Joe

  22. EIB says:

    Uhh, what do you mean by “bear market”
    The market is almost at all time highs.
    We are in a bull market.


    BR: Really? What are the 10 year returns on the Nasdaq or S&P500 or Dow ?

  23. [...] What is Driving Investors? Hint: Many Things | The Big Picture [...]

  24. bear_in_mind says:

    I think retail investors are much more focused on capital preservation than break-neck returns. If my hunch is correct, I’d say the Muppets are wiser than Dimon and Blankfein think. And as many have already commented, the markets have become as opaque as pea soup and as crooked as Highway 1 in Big Sur (think: scandal after scandal after…). So, it’s not irrational to hold on to your hard-won assets when you can’t trust the brokers, markets, regulators or laws to keep transactions honest. Eventually this will change, but I won’t be holding my breath waiting for it. But I will hold my nose and dollar-cost-average new pre-tax monies into low-fee index ETF’s while keeping a healthy slug in bond ETF’s and good ole’ money market funds @ 2.8 pct returns. It ain’t risk-free and it’s subject to change, but I can live with 6.5-7 pct annual returns right now and sleep at night knowing that I’m not sitting on C, BAC, FB, SBUX or (insert ticker) time bomb waiting that could halve my portfolio.

  25. phillips49 says:

    BR is right, there are many different reasons and each person has their own. I can only speak for myself. And I had to think about them to clarify them in my own mind. So here are my reasons to be 80% bonds, 10% stocks & 10% cash:

    1. Time – I AM a boomer. I’ve been through the crash of ’87, the dot com bust, 911, the financial crisis, flash crash etc.…I don’t have time left to do it again, pure and simple. My retirement will be my IRAs and 401K. I’ve got what I got and I’m done taking risk. I’ll manage.
    2. Confidence – I have lost faith in the stock market as a long term wealth producer. It is NOT about valuations and good companies anymore. It is about everything else. HFTs, Europe, the economy, jobs, the FED, China PMI, cycles, hedges, strategies and whatever else. It is not about investing now. It is about bets.
    3. Knowledge – The information age has made facts, data and diverse opinions, finger tip available. This helps one shape their outlook. Mine is flat to slightly positive.
    4. Performance – At the end of the day it is all about performance. We’ve lost a decade…we’re back to ’99.
    5. Faith in the future – We are in for a very long slow recovery for a lot of different reasons I won’t go into here. Earnings have peaked and started to slide with little near term hope for improvement. As growth and earnings go, so goes the market.
    6. Cycles – I subscribe to the cowardly lion theory espoused by Vitaley Katsenelson which BR would describe as a bear market. This is evidenced by collapsing PE ratios. My current view..we still have a long way to go. PEs in single digits are historically possible.

    Don’t get me wrong here. I’m not sour grapes. I’ve made damn good money in the market. I just intend to keep it. As the song goes..you gotta know when to hold’em, know when to fold’em, know when to walk away and know when to run.

  26. [...] this week, alluded to the recent Bill Gross criticism on the Death of the Cult of Equities (See this and this). Several references to Stocks for the Long Run have been made, including the [...]