Don’t Trust the Market? You’re Not Alone, For Good Reason
Gold settled at its lowest level since February 2011 and the major indices were off more than 1% on Monday in a lack of confidence after the Dow and S&P 500 hit their highest levels ever last week, evidence that enthusiasm for stocks on Main Street remains muted at best.
Oh sure, there are plenty of stories about retail investors “rushing” back into the market but such analysis fails to put the recent trend into perspective.
In the first quarter, inflows into equity mutual funds totaled $62.5 billion, according to Lipper. If this pace keeps up, 2013 inflows would be the highest since 2000, according to CNN Money.
By comparison, approximately $445 billion came out of equity mutual funds from 2007 to 2012. And after a very strong start in January, inflows dried up in February suggesting investors will be quick to head for the exits at the first sign of trouble.
Indeed, Monday’s stock selloff and rout in gold are almost certain to test any recent excitement for investing.
Many reasons have been proffered for investors’ reticence to embrace the rally, notably: a still sluggish economy, high unemployment, falling median household income, fresh scars from the Great Recession, as well as bad memories of the bursting of the Dot.com and housing bubbles.
Another factor, one not easy to measure, may be the biggest contributor of all: Trust, or lack thereof.
In sum, investors don’t have faith in the rally because they don’t have faith in the market itself. According to the Chicago Booth/Kellogg School Financial Trust Index, more than half of Americans (58%) think it's likely that the stock market will drop by more than 30% in the next 12 months while only 22% say they trust the financial system.
Wall Street Scandals: The Beat Goes On
Last week brought more fodder that the game is rigged.
First, a former KPMG partner, Scott London, admitted to passing on insider information about two of his top clients, Herbalife and Skechers USA. Government authorities believe London may have also passed along insider information about Deckers Outdoor as well as pending acquisitions of RSC Holdings and Pacific Capital Bancorp.
This was a pretty classic insider trading violation and done in a ham-handed way, suggesting both a lack of sophistication among the participants and little fear of getting caught.
In recent years, the government prosecuted one-time hedge fund giant Raj Rajaratnam and his alleged tipsters, including former Goldman board member Rajat Gupta for insider trading. This year, the Fed is targeting SAC Capital’s Steven Cohen, one of the world’s most successful (and wealthy) hedge fund managers.