Market high is a memory; investors are wary of stocks

Associated Press

NEW YORK

When the stock market hit its all-time high three years ago — three years that somehow seem much longer — Bob Auer’s life was very, very easy.

Then a broker with Morgan Stanley in Indianapolis, Auer had no trouble convincing clients that they could make money buying stocks.

“You could pick up the phone and get people to do just about anything because everything was working, and it had been working for a while,” he says.

A bubble fueled for years by easy credit and soaring real estate values stopped expanding Oct. 9, 2007. That day, the Standard and Poor’s 500 hit 1,565. Within a month, it had fallen more than 7 percent as traders began questioning subprime loans.

You know the story from there. Investors who stuck with the market through the worst financial crisis in 70 years are still down about 20 percent from the boom days after accounting for dividends, wondering whether their accounts will ever recover.

If history is any guide, it may be a while. It took 15 years for investors to recover from the Crash of 1929 if they reinvested their dividends, and 25 years for the stock market to come back if they didn’t, according to a study by Ned Davis Research.

Though no one is betting that it will take until 2032 for the stock market to fully recover this time, there are signs that investors could be drifting in the doldrums for a while, even after last year’s rebound. It took seven years for stock prices to regain their highs after the Internet bubble burst in 2000.

High unemployment, stagnant home prices and a shrinking demand for stocks as baby boomers begin to retire likely will stomp on the foot of any market run-up in the future, economists say.

Even if the market has another 9 percent jump as it did in September, few expect it to last.

“It’s going to be some time before you see the S&P back at 1,575,” said Keith Hembre, the chief economist at First American Funds. “There’s a tremendous number of imbalances out there, whether it’s the deficit, zero percent interest rates or the bloated federal balance sheet.”

On Friday, the S&P 500 closed at 1,165.15, still 25 percent off its all-time high. The Dow broke through 11,000 for the first since in May but remains 22 percent below where it stood in October 2007.

The money moving out of mutual funds shows that many investors have lost faith in the U.S. stock market. Since October 2007, they’ve pulled $262 billion from funds that invest in domestic stocks, according to the Investment Company Institute. Investments in bonds have jumped by about $634 billion in the same time.

When they decide to buy something other than bonds, more investors are taking advantage of new funds that make it easier to invest in assets that were once too complicated or expensive for nonprofessionals.

In the last three years, approximately $85 billion has been invested in mutual funds that hold stocks in emerging markets such as China and Brazil, and an additional $65 billion has gone into funds in commodities such as cotton and copper, according to Morningstar.