Stock Market Regresses

The stock market is behaving increasingly like a petulant teenager. It's moody, impulsive, flighty, delirious one moment, and despondent the next. Since the financial crisis of 2008, individual investors have fled while professional traders increasingly dominate. Today, computerized trading is a larger part of the market than trading by sentient human beings. Computerized trading to a large degree involves following trends (the stock market term is "momentum trading"). Does that remind you of high school?

Investing on fundamentals seems to be done more outside the market than in it. Look Warren Buffet's big deals--in negotiated transactions, he bought a railroad, and special preferred stock from Goldman Sachs and Bank of America. He doesn't bet big money (that is, big money for him) trading stocks.

The stock market has become a playground for professional traders, who use it for short term speculation. In that way, it has regressed back to the 19th Century. When the robber barons held sway, savers didn't put their money into common stocks. They made deposits in bank accounts and bought bonds. Common stock was viewed as a vehicle for gambling. The few stocks that savers might buy were those with a solid history of paying dividends, and perhaps preferred stock, which had rights to dividends superior to common stock but no voting rights. Either way, a stock's ability to deliver cash in the form of dividends was crucial to its attractiveness to savers.

The state of affairs today is comparable, with so much cash flowing into banks that at least one is charging large depositors for the privilege of making deposits. The U.S. Treasury market is rallying from the flow of funds out of stocks and into safe havens, in spite of S&P's downgrade. There remains some investor interest in stocks that are proven dividend payers. Otherwise, the thrill of capital appreciation is increasingly left to the Wall Streeters who let their computers do the trading.

The Federal Reserve's relentless campaign to crush all interest rates attempts to coerce savers to put their money into riskier assets, in the belief that if savers lose their life savings to market volatility, the economy will somehow recover. But the Fed seems to be missing a basic point about investing. It's done when savers have confidence in the investment. When savers think the putative investment is a tractor trailer laden with bullswaggle, they won't send in a buy order. Making savers feel poorer by taking away their only safe sources of interest income will make them more insecure, spend less and swear off stocks. People who can stash some of their savings in secure, income generating vehicles are more likely to risk other savings in stocks. People who are repeatedly frustrated in their quest for a port in today's financial storms won't unfurl the sails and hope that the gale will somehow propel them to calmer waters.

The Fed seeks a wealth effect by using lower interest rates to support and bolster stock prices. The problem is that lower interest rates make savers feel less wealthy, especially retirees who count on their savings. Has the Fed netted out the discouragement to savers it imposes against the encouragement it gives to stockholders? Since many people are both savers and stockholders, they'll net out the impact, understanding that you can never recoup interest that didn't accrue during a time of low rates, but that stock gains may be ephemeral. Then they'll boost spending--or not.

With the advent of derivatives, computerized trading and no end of structured financial products that are too complex for battered investors to truly understand, it's easy to overlook the regressing of the financial markets. But with that in mind, is it any wonder individual stock market investors are becoming an endangered species?