Demographics is destiny, the saying goes, and the behavior of three big demographic groups is adversely affecting the traditional stock market. These groups are selling stocks (equities) and apparently staying away. Baby boomers (ages 46 to 64) are or soon expected to be net sellers of stocks to generate cash for retirement living, according to the Federal Reserve Bank of San Francisco. Generation X (ages 31 to 45) and Generation Y (ages 18 to 30) regard the stock market with fear and loathing, much like their Great Depression era grandparents, whose burned-in thriftiness persisted in better times. Finally, all of the groups are reducing their equity investments because of the extreme daily volatility that has almost become the norm.
Historically, mutual fund investors bought after significant sell-offs: they did so after Black Monday in October 1987, the Asian currency crisis of 1997, the Russian debt default of 1998, and the bear market of 2002. But it is different this time. Housing prices were rising then. But the housing price crash that began in 2007 is still with us, and has resulted in “significantly more wealth destruction this time around,” according to Vanguard Group principal Francis Kinniry.
With double digit unemployment, the threat of an even worse global recession if the European debt crisis is not contained, U.S. political paralysis, and the vertigo-inducing volatility of the stock market have apparently hardened the resolve of many Boomers and Gen Xers, while 40% of surveyed Gen Yers that agree with the statement: “I will never feel comfortable investing in the stock market.”
Investors had already experienced the dot.com bust of 2000, the 57% decline in the S&P 500 stock index from October 2007 to March 2009, and the flash crash of May 2010. $26 billion flowed out of mutual funds from May 1 to August 10 ($23.5 billion in one week in August). Institutions have only modestly adding to their holdings ($689 million during the same period).
“You can’t keep having bombs, so to speak, go off,” JP Morgan Fund’s market strategist Andrew Goldberg was quoted as saying, adding: “If the second you walk outside another one goes off, you’re going to stay inside for longer, and that’s what’s going on.”
Cash is king, goes another saying. According to Bank of America Merrill Lynch, holdings of cash are at their highest levels since the record levels of March 2009. The youngest group, Gen Yers, have the largest cash position of any group ? 30% their portfolios. The reason: fear of stock market volatility and economic uncertainty (i.e., the need for a rainy day fund).
Atlanta attorney J. Boyd Page observed: “The net selling by Boomers will likely increase as more of them retire. One question is how long the fear of volatility and economic pessimism will keep the Gen Xers and Gen Yers out of the stock market. They could be like the Depression generation who were distrustful of the stock market for a long time. It raises another question: What is going to happen to the equity markets? Will they survive as we know them? If retail investors continue to abandon the equity markets, it could adversely impact the liquidity of stocks. Similarly, if demand wanes, profit opportunities become more limited.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.