ABANDONING EQUITIES
Robert O. Welk RowTek Economics
Stock prices, as measured by the S&P
500, have nearly doubled since the low in March 2009. Yet, as
indicated by the Investment Company Institute, investors have been
reducing their holdings of equities. Net outflows of domestic equity
funds were $39 billion in 2009 and $96 billion in 2010. In fact, there
have been four consecutive years of withdrawls totaling $335
billion. Some of this behavior can be due to the uncertainty that
has prevailed in the financial markets during the past decade which has
led to more risk aversion. Also, as the population ages risk
aversion increases automatically. There has been a large flow
into bond funds and some increase in foreign funds and ETF's. But
I think there are other factors at work as well.
Many personal acquaintances, and my own financial advisor's clients, feel that for many reasons, they are at a great disadvantage in the stock market. The impression is that it is no longer a place where deliberate parties determine a market price for an investment. Rather, it has become a place for chance and gambling. (In the 1960's Paul Samuleson published a paper that suggested the stock market was like going to a casino.) First of all, there have been all the revelations of insider trading: David Sokol, the conviction of Raj Rajaratnam, and many others. What was behind the "flash crash" in May of last year? Hedge funds have grown in importance and many invest for short term volatility. How do all the numerous derivatives affect what is happening? And what about high frequency trades, which have been reported as accounting for as many as 60% of daily trades? These are automatic trades, based on computer algorithms, which attempt to gain profits out of small differences between buy and sell orders. The trades occur in milli-seconds and rely on volatility. It is also increased volatility in the stock market which is unsettling to the retail investor.
The following chart shows what has occurred with volatility during just the past six years.
This frequency distribution shows daily volatility for the 12 months ending this past April in terms of percent change between low and high by number of days. It is compared with the same months following the stock market low which occurred after the telecom bust.
In the past six years volatility has clearly increased. There have been 56 days of higher volatility recently than occurred following the 2003 stock market low. The highest intra-day change following '03 was 2-2.25% for two days. Recently, there were 26 days higher than that and 9 days between 3-3.75%. It is difficult to assign the reasons for the increased volatiltiy, but clearly it is occurring, and current practices in the market are fostering it. If it continues, or increases, the retail investor is not likely to be won back!
Copyright © 2011 RowTek Economics. All rights reserved.
BACK TO MAIN PAGE
Many personal acquaintances, and my own financial advisor's clients, feel that for many reasons, they are at a great disadvantage in the stock market. The impression is that it is no longer a place where deliberate parties determine a market price for an investment. Rather, it has become a place for chance and gambling. (In the 1960's Paul Samuleson published a paper that suggested the stock market was like going to a casino.) First of all, there have been all the revelations of insider trading: David Sokol, the conviction of Raj Rajaratnam, and many others. What was behind the "flash crash" in May of last year? Hedge funds have grown in importance and many invest for short term volatility. How do all the numerous derivatives affect what is happening? And what about high frequency trades, which have been reported as accounting for as many as 60% of daily trades? These are automatic trades, based on computer algorithms, which attempt to gain profits out of small differences between buy and sell orders. The trades occur in milli-seconds and rely on volatility. It is also increased volatility in the stock market which is unsettling to the retail investor.
The following chart shows what has occurred with volatility during just the past six years.
This frequency distribution shows daily volatility for the 12 months ending this past April in terms of percent change between low and high by number of days. It is compared with the same months following the stock market low which occurred after the telecom bust.
In the past six years volatility has clearly increased. There have been 56 days of higher volatility recently than occurred following the 2003 stock market low. The highest intra-day change following '03 was 2-2.25% for two days. Recently, there were 26 days higher than that and 9 days between 3-3.75%. It is difficult to assign the reasons for the increased volatiltiy, but clearly it is occurring, and current practices in the market are fostering it. If it continues, or increases, the retail investor is not likely to be won back!
Copyright © 2011 RowTek Economics. All rights reserved.
BACK TO MAIN PAGE