Stocks & Markets

Small Investors Remain Wary After 69% U.S. Stock Bounce


Retail investors can't win.

A year ago, they watched with horror as their portfolios and the stock market hit a 12-year low. The broad Standard & Poor's 500-stock index plunged 57% from Oct. 9, 2008, to Mar. 9, 2009.

Now, individual investors appear to have missed out on an explosive, yearlong stock market rally.

Recent market data suggest large institutional investors, and not small-time individuals, have fueled the stock rally, which has pushed the S&P 500 up 69.3% since Mar. 9, 2009.

Retail investors have stayed on the sidelines, according to measures of money flows into and out of mutual funds, which are a popular investment tool for individuals. According to TrimTabs Investment Research, investors have pulled $8.7 billion from U.S. equity mutual funds in the past 12 months. In the same period, they pushed $13.8 billion into bond funds.

Polls of individual investors show persistent levels of skepticism about the outlook for stocks. According to weekly surveys conducted by the American Association of Individual Investors, 33.2% of members have been "bearish" over the past four weeks, and another 31% neutral, even as the S&P 500 gained 7.8% in that time period.

And, when stocks turn lower, investors appear prone to panic. As recently as Feb. 4, when the S&P 500 was down 4.7% for the year, bearishness in the AAII survey hit 43%, the highest level since Nov. 5 and the second-highest level since Mar. 4, 2009, when bearishness reached 70.5%.

Stock Aversion

Professionals who work with individual investors have noticed their aversion to stocks.

"They've lost a lot of confidence in the asset class," says Jeff Layman, chief investment officer at BKD Wealth Advisors in Springfield, Mo.

For Layman's "typical client," the rebound in equities is seen as an opportunity to sell, not buy, stocks. He says they would rather take profits and move into safer investments like bonds—despite the low yields now offered by fixed-income instruments.

Ronald Kiddoo, chairman and chief investment officer at Cozad Asset Management in Champaign, Ill., says clients are reluctant to put new money into stocks. They get alarmed whenever stocks fall—as they did in late January and early February.

"I see much more anxiety in them than before the big meltdown," Kiddoo says.

Despite the yearlong rally, Ed Yardeni, president and chief investment strategist of Yardeni Research in New York, says "sentiment has been bearish, with most investors convinced that 'this will all end badly.' " Based on the data, Yardeni wrote Mar. 8, "Individual investors remain especially cautious on the stock market."

For all investors, safe investments remain popular. According to the Investment Company Institute, $3.17 trillion remains in money market funds. That's less than the $3.9 trillion in cash on Mar. 4, 2009, but it's still 52% above the average amount—$2.1 trillion—in money markets over the last decade.

Pros Are Buying

Professional investors appear far more willing to take risks. Fund managers are buying so many stocks that the portion of cash in their funds fell to 3.6% in February, according to the Investment Company Institute. The decline from 5.7% in January is the quickest drop since 1991, Bloomberg News reported on Mar. 8.

The Bloomberg Professional Global Confidence Survey, released Mar. 10 and based on responses from Bloomberg users, shows confidence in U.S. stocks at a reading of 47.8 in March, up from 35.6 in February.

Milo Benningfield, of Benningfield Financial Advisors in San Francisco, says his individual investor clients remain fearful of stocks. "Nobody believes the rally is real," he says.

After major corrections for stocks at both the end and the beginning of the last decade, many retail investors have come to the conclusion that the stock market is not for amateurs, Layman says. "They look at this stock market … as a place that operates outside their control," he says.

Perhaps that is an appropriate lesson to take from the past few years, Benningfield says. Individuals are "wiser," he says. "They're being smarter about their ability to take on risk."

Go Signs

What could cause investors to change their mind and embrace stocks again?

"It's a slow process," Kiddoo says, but first individual investors need to see the U.S. economy creating jobs.

Layman believes it could take a couple of years of positive stock market returns before individuals return to equities. Unfortunately, by then, he says, "they've missed a fair amount of the return."

After the last few years, many investors seem to have decided they're perfectly willing to miss out on gains—as long as they're spared unexpected losses.

Steverman is a reporter for Bloomberg News in New York.

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