Spelling trouble for the U.S. stock market, Wall Street data shows that equity investors have been dumping stocks from their portfolios. While the stock market has a history of beating bonds by 5% since 1900, mutual fund investors have been gun shy since the epic meltdown began under President Bill Clinton in 2000. Investors saw unprecedented returns during the late ‘90s dot-com boom, watching blue chip and tech stocks quadruple in a few years. Like other bubbles, when the dot-com bubble burst in March 2000, the tech-rich Nasdaq was over 5,000. Over 12 years later in the current bull market, the index stands at 2,985 or still more than 60% down from its 5,000 high in March 2000. When it comes to blue chip stocks, the Dow Jones Industrials closed today at 13,096, only 500 points above its close in March 2000, less than a 5% gain over the past 12 years.
If you consider an annual return of only .41% since March 2000, you wouldn’t give the stock market much credibility. When investors saw Wall Street icon Bernie Madoff convicted March 12, 2009 on 11 separate felonies, the $60 billion Ponzi scheme gave Wall Street a big black eye. Never again would Wall Street regain its credibility as the engine of American entrepreneurship, forever tainted by shyster practices that cost investors their life-savings and futures. “You have to trust your government. You have to trust other governments. You have to trust Wall Street,” said 47-year-old Adam Neitlich, a former analyst picking stocks for a mutual fund. Like Neitlich, American stock investors have sold more than they’ve bought for the last five years, despite the current bull market. Stocks have more than doubled since they bottomed in March 2009, at the pit of the Great Recession.
When you consider the gridlock in Washington or the so-called “fiscal cliff” threatening to plunge the economy into a double-dip recession, investors have lost long-term confidence. Once a sure bet for long-term investors, the stock market can no longer be counted on—now matter how diversified—for long-term security. “People don’t trust the market anymore,” said Manhattan College financial historian Charles Geist. Calling Wall Street’s problems a “crisis of confidence,” Geist believes that Wall Street hasn’t delivered the promise of sharing American business prosperity with small investors. Since April of 2007, investors have pulled $380 billion from mutual and exchange-traded funds. Federal Reserve data shows that the nation’s biggest pension funds have sold more than $861 billion more stocks than they’ve bought since April 2007, six months before the Great Recession began.
If you look at Washington’s maddening gridlock, lawmakers have held Wall Street—and investors—hostage to partisan politics. When S&P downgraded U.S. credit Aug. 5, 2011, the overwhelming message was for Washington to stop bickering. Since the downgrade, it’s only gotten worse. With only four days left before New Year’s Eve, the White House and Congress continue to play with investors’ money. If no deal is reached before Dec. 31, both parties, no matter who’s blamed, are responsible for driving the economy back into a ditch. Regardless of who’s right or wrong, President Barack Obama needs to recognize the reality of divided government and do what’s right for the economy: Extend Bush-era tax cuts, even to millionaires and billionaires. If Washington showed some consensus on the “fiscal cliff,” Wall Street would stabilize the U.S. employment and tax picture.
Without the stability of long-term investing, publicly-traded companies don’t have the long-term resources to hire more workers. Restoring Wall Street’s long-term investing is essential to the future of the U.S. economy. Nothing kills the market more than watching Washington’s endless food fights. Instead of doing what’s best for the country, both parties continue political posturing. As S&P pointed out, long-term stability of U.S. credit depends on both parties making mutually beneficial decisions. “The Great Recession will have a lasting impact beyond what a standard economic model would predict,” said Depression-era expert Ulrike Malmendier. So-called “Depression babies” tend to be more skeptical of Wall Street, showing little risk-tolerance for long-term equity investing. Malmendier hopes that Wall Street can once again get back to solid long-term investing.
Restoring confidence in Wall Street can’t happen unless Washington gets its act together. Judging by the disastrous fiscal cliff negotiations, both parties need to agree on at least one thing: That a prosperous economy helps everyone. Fighting tooth-and-nail caused S&P to downgrade U.S. credit in 2001. Going over the fiscal cliff could trigger a tsunami in the stock market, driving more investors out of mutual and exchange-traded funds. If the exodus continues out of stocks, publicly traded companies won’t have the capital to hire new employees or retain old ones, repeating the disastrous layoffs that triggered the Great Recession. Obama and Congress must come to their senses quickly before it’s too late. Even if Barack can’t get his way, he’s better off agreeing to keep Bush-era tax cuts for everyone. Without a deal, Wall Street will almost certainly lapse into profit-taking and correction mode.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.