Re­ces­sion’s im­pact was fright­en­ing, long-last­ing


Austin American-Statesman - - BUSINESS - Con­tin­ued from B

in­clud­ing rel­a­tively new ex­change-traded funds, which in­vestors like be­cause of their low fees.

“Peo­ple don’t trust the mar­ket any­more,” said fi­nan­cial his­to­rian Charles Geisst of Man­hat­tan Col­lege. He says a “cri­sis of con­fi­dence” sim­i­lar to one af­ter the crash of 1929 will keep peo­ple away from stocks for a gen­er­a­tion or more.

The im­pli­ca­tions for the econ­omy and liv­ing stan­dards are un­clear but po­ten­tially big. If the pull­back con­tin­ues, some ex­perts say, it could lead to lower spend­ing by com­pa­nies, slower U.S. eco­nomic growth and per­haps lower gains for those who re­main in the mar­ket.

Since they started sell­ing in April 2007, eight months be­fore the start of the re­ces­sion, in­di­vid­ual in­vestors have pulled at least $380 bil­lion from U.S. stock funds, a cat­e­gory that in­cludes both mu­tual funds and ex­change-traded funds, ac­cord­ing to es­ti­mates by the AP. That is the equiv­a­lent of all the money they put into the mar­ket in the pre­vi­ous five years.

In­stead of stocks, they’re putting money into bonds be­cause those are widely per­ceived as safer in­vest­ments. In­di­vid­u­als have put more than $1 tril­lion into bond mu­tual funds alone since April 2007, ac­cord­ing to the In­vest­ment Com­pany In­sti­tute, a trade group.

Sell­ing dur­ing both a down­turn and a re­cov­ery is un­usual be­cause Amer­i­cans al­most al­ways buy more than they sell dur­ing both.

Since World War II, nine re­ces­sions (prior to the most re­cent re­ces­sion) have been fol­lowed by re­cov­er­ies last­ing at least three years. Ac­cord­ing to data from the In­vest­ment Com­pany In­sti­tute, in­di­vid­ual in­vestors sold dur­ing and af­ter only one of those pre­vi­ous down­turns — the one from Novem­ber 1973 through March 1975. And back then, a scary stock drop around the start of the re­cov­ery’s third year, 1977, gave peo­ple am­ple rea­son to get out of the mar­ket.

The un­usual pull­back this time has spread to other big in­vestors — pub­lic and pri­vate pen­sion funds, in­vest­ment bro­ker­ages and state and lo­cal gov­ern­ments. Th­ese groups have sold a to­tal of $861 bil­lion more than they have bought since April 2007, ac­cord­ing to the Fed­eral Re­serve.

Even for­eign­ers, big pur­chasers in re­cent years, are sell­ing now — $16 bil­lion in the 12 months through Septem­ber.

As th­ese groups have sold, much of the stock buy­ing has fallen to com­pa­nies. They’ve bought $656 bil­lion more than they have sold since April 2007.

On Wall Street, the in­vestor re­volt has largely been dis­missed as tem­po­rary. But doubts are creep­ing in.

A Cit­i­group re­search report sent to cus­tomers con­cludes that the “cult of eq­ui­ties” that fu­eled buy­ing in the past has lit­tle chance of coming back soon.

In­vestor blogs spec­u­late about the “death of eq­ui­ties,” a line from a fa­mous Busi­ness­Week cover story in 1979, an­other time many peo­ple had seem­ingly given up on stocks. Fi­nan­cial an­a­lysts lament how the re­treat by Main Street has left daily stock trad­ing at low lev­els.

The in­vestor re­treat may have al­ready hurt the frag­ile re­cov­ery.

The num­ber of shares traded each day has fallen 40 per­cent from be­fore the re­ces­sion to a 12-year low, ac­cord­ing to the New York Stock Ex­change. That’s cut into earn­ings of in­vest­ment banks and on­line bro­kers, which earn fees help­ing oth­ers trade stocks. Ini­tial pub­lic of­fer­ings, an­other source of Wall Street prof­its, are hap­pen­ing at one-third the rate be­fore the re­ces­sion.

And old as­sump­tions about stocks are be­ing tested. One in­vest­ing gospel is that be­cause stocks gen­er­ally rise in price, com­pa­nies don’t need to raise their quar­terly cash div­i­dends much to at­tract buy­ers. But com­pa­nies are in­creas­ing them lately.

Div­i­dends in the S&P 500 rose 11 per­cent in the 12 months through Septem­ber, and the num­ber of com­pa­nies choos­ing to raise them is the high­est in at least 20 years, ac­cord­ing to Fac­tSet, a fi­nan­cial data provider. Stocks now throw off more cash in div­i­dends than U.S. government bonds do in in­ter­est.

Many on Wall Street think this is an un­nat­u­ral state that can­not last. Af­ter all, peo­ple tend to buy stocks be­cause they ex­pect them to rise in price, not be­cause of the div­i­dend.

But for much of the his­tory of U.S. stock trad­ing, stocks were con­sid­ered too risky to be re­garded as lit­tle more than ve­hi­cles for gen­er­at­ing div­i­dends.

In ev­ery year from 1871 through 1958, stocks yielded more in div­i­dends than U.S. bonds did in in­ter­est, ac­cord­ing to data from Yale econ­o­mist Robert Shiller — ex­actly what is hap­pen­ing now.

So maybe that’s nor­mal, and the past five decades were the aber­ra­tion.

Peo­ple who think the mar­ket will snap back to nor­mal are un­der­es­ti­mat­ing how much the re­ces­sion scared in­vestors, says Ul­rike Mal­mendier, an econ­o­mist who teaches at the Univer­sity of Cal­i­for­nia, Berke­ley and has stud­ied the ef­fect of the Great De­pres­sion on at­ti­tudes to­ward stocks.

She says peo­ple are ig­nor­ing some­thing called the “ex­pe­ri­ence ef­fect,” or the ten­dency to place great weight on what you most re­cently went through in de­cid­ing how much fi­nan­cial risk to take, even if it runs counter to logic. Ex­trap­o­lat­ing from her re­search on “De­pres­sion Ba­bies,” the ti­tle of a 2010 pa­per she co-wrote, she says many young in­vestors won’t fully em­brace stocks again for an­other two decades.

“The Great Re­ces­sion will have a last­ing im­pact be­yond what a stan­dard eco­nomic model would pre­dict,” she said.

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