The retreat shows that even the biggest gain since 1998 failed to heal investor confidence after the financial collapse that wiped out $11 trillion in U.S. equity value was followed by record price swings in equities, a market breakdown that briefly erased $862 billion in share value and the slowest recovery from a recession since World War II. Individuals are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.
“Our biggest liability in the stock market has been the total destruction to confidence,” James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion, said in a telephone interview. “There’s just so much evidence of this recovery broadening.”
The S&P 500 dropped 1.9 percent to 1402.43 last week, putting its 2012 gain at 12 percent, led by financial stocks and consumer companies. The benchmark index from American equity has risen from a low of 676.53 on March 9, 2009, though it is still 8.8 percent below its record high on Oct. 9, 2007.
Now, much of the damage to investors is self-inflicted as U.S. growth improves and companies whose earnings are most tied to economic expansion reap the biggest rewards. Of the 500 companies in the benchmark index, 481 are higher now than they were in March 2009 or when they entered the gauge.
Expedia, the online travel agency, rallied 577 percent, leading consumer discretionary companies to the biggest advance from 2009 through the third quarter. Capital One Financial rose 39 percent this year as the lender posted profit that beat projections by 19 percent last quarter.
PulteGroup, the largest U.S. homebuilder by revenue, more than doubled this year after the Bloomfield Hills, Mich.-based company had its biggest annual earnings increase in 2012 and the housing market rebounded.
Individuals are selling into the rally, cutting the proportion of assets in stocks to 72 percent from 72.5 percent in 2009, according to 401(k) and IRA mutual fund data from the Washington-based Investment Company Institute compiled by Bloomberg. The data are for all equities, bonds and hybrid funds and excludes money markets. Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.
The percentage of households owning stock mutual funds has also fallen, dropping every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997, according to a ICI mutual fund survey.