It's no secret investor confidence has been plagued by worries galore in recent years. In years gone by, an upward-trending stock market alone might have been enough to convince the retail investor to flood money into the market. But in the post-"Flash Crash" world of investing, things have changed. Since the May 6, 2010 crash, a day in which the S&P 500 (SPY) and Dow Jones Industrial Average (DIA) were down 8.59% and 9.19% respectively at their lows, there is one thing the investing community has been able to rely on: whether the market is up or whether the market is down, the retail investor is selling stocks.
How bad has it been? Since May 2010, there have only been three months in which domestic equity mutual funds have had inflows (January, February, and April of 2011). At the moment, it appears May 2012 will become the 22nd of the last 25 months and the 13th consecutive month of outflows from domestic equity mutual funds. While things have been a bit better for non-U.S. equity mutual fund flows, total fund flows (U.S. and non-U.S.) are still quite negative, soon to be down 19 of the last 25 months, and 12 out of the last 13.
Why is it that retail investors seem to have had enough of the stock market? Besides the major indices having already suffered two brutal bear markets since the year 2000, there is a whole host of other things plaguing investor confidence in stocks. Let's take a look at what I call "The 7 Plagues of Investor Confidence."
1. Without a doubt, the "Flash Crash" had a profound impact on investor confidence. The data presented above helps illustrate this. When major market indices can fall as far as they did in just a matter of minutes on May 6, 2010, can the retail investor be blamed for feeling put off by the stock market?
2. All the woes facing Europe at this time are clearly not a confidence booster. And thus far, there seems to be no positive end in sight.
3. Last year, MF Global made a bunch of bad bets, stole money from its customers, and then, to top things off, filed the eighth largest bankruptcy by assets of any public company in history. This doesn't exactly inspire confidence in the financial industry's propensity to follow the rule of law as it pertains to the protection of customer funds.
4. After more than three years of ZIRP (zero interest rate policy), continued historically low interest rates might be viewed as a sign that things have not healed, that we are not operating in a self-sustaining economic recovery, and that investors should carry on with an abundance of caution. As William Dudley, President and CEO of the Federal Reserve Bank of New York, said in a recent interview with CNBC's Steve Liesman, "The sooner we get a strong economic recovery, the sooner we can normalize interest rates."
5. The "Fiscal Cliff," which is receiving quite a bit of attention in recent days, is yet another confidence killer. First, it is a reminder that once the election is over, investors will have to live through another gigantic round of political wrangling in Washington.
Second, it is also a reminder of the difficulty Congress will have following through with any spending cuts or tax hikes large enough to one day bring the Federal deficit under control. If merely slowing the pace of future spending growth can cause the uproar it has and could send the U.S. into recession, combined with the fact that members of the two major political parties, on the whole, distrust and dislike each other, how in the world will the U.S. ever get its fiscal house in order?
Third, whenever we hear about this program or that law that must be extended, it is simply another reminder that nothing is more permanent than a temporary government program/law; and that's a problem when you're trying to stop a debt trajectory that is downright scary. For the retail investor looking to invest in stocks for the long run, does all this help inspire confidence?
6. At last, we have a high-profile IPO in which the retail investor was able to get a decent amount of skin in the game. With all the hype leading up to Facebook's (FB) IPO, surely this would be a confidence building home run for the equity markets with regard to the retail investor. But look what happened. We're just six days into trading, and Facebook is already 16.03% below its IPO price, not to mention the fact that Nasdaq's (NDAQ) handling of the IPO leaves much to be desired and probably leaves many retail investors wondering how things could have gotten so screwed up.
7. Last, but not least, is the perpetual uncertainty that seems to permeate the investing and political worlds as well as the everyday lives of millions of Americans. From an investing perspective, JPMorgan's (JPM) recent trading/hedging debacle only adds more uncertainty towards investing in the black box that is the too-big-to-fail banks. Furthermore, the banking industry will have to contend with new regulations and higher capital requirements over the coming years. Investors will have to deal with the intended and unintended consequences those changes will have on the banks and the broader economy.
From a political perspective, investors are currently left to wonder what lawmakers will allow to happen with capital gains taxes and what laws might be overturned if one political party or the other takes over Congress next year (and the effects those changes will have on businesses). Moreover, what will be the outcomes of the many debt ceiling debates likely to occur on Capitol Hill over the coming years.
Finally, investors and non-investors alike must contend with housing prices still well off their peaks, especially in real terms. They must deal with rising health care costs continuing to outpace wage growth. The ever rising cost of college weighed against the realistic salaries recent college grads, on the whole, can command in the post financial crisis job market will have many consequences over the years to come, some of which are likely not yet even realized or understood. Then there's the breathtaking pace with which technology seems to be changing the world in which we live, making it all the more difficult to predict what the world will look like just a few years from now, let alone over a lifetime of investing. And, of course, there's that difficult catch 22 the world seems to be caught in, in which rising stock markets seem to beget rising commodity prices, which eventually put the squeeze on consumers and corporations.
I'm sure there are many other things I could include under the perpetual uncertainty plague, but at this point, it seems best to continue on and ask the question, "How do we bring confidence back?" When I look at the seven plagues outlined above, I see a list that includes things structural in nature and that went beyond just destroying confidence but also destroyed trust. I also see a list of things that will be very difficult to deal with from both a structural and a restoring trust perspective and will likely be with us for years to come. And, I see a list of things which include some that could cause incredible gyrations in asset prices going forward. Instead of waiting all the years it will take to work through the confidence and trust killers outlined above, in order to help investors feel more confident in their abilities to navigate the financial markets, it's important to fill their tool kits with strategies that will help them allocate their money more efficiently and adjust to changing market environments in adept ways.
Sometimes learning to think in non-linear, non-conventional ways will open your eyes to a whole new set of investing possibilities you never knew existed. In many of my articles, I spend a lot of time trying to present different types of strategies and ideas that can be applied not just to the specific companies mentioned in the articles, but also to a myriad of other companies. Two recent examples of articles in which I discuss strategies for investing across a company's capital structure and across different asset classes include, "A Different Way To Play ArcelorMittal," and "A Different Way To Get Long Gold." As time goes on, I hope to add more ideas and more examples of out-of-the-ordinary ways to think about the markets and to approach portfolio allocation.
Perhaps, if we help investors arm themselves with the knowledge of various investing strategies and ways to navigate through the ups and downs of the post-2008 investing world, people will feel more confident, confident enough to not only dip their toes back into the equity market as time goes on, but to also expand their horizons to include investments they may have never explored before, such as individual bonds, options, or even gold (GLD).
Additional disclosure: I am long gold. I am long JPMorgan bonds.