5 De-leveraging: The marginal buyers are out of the market as they de-leverage excess credit consumption. There is an entire cohort of investors who are no longer playing with equities. Indeed, they have been priced out of all investment options as they rebuild their personal balance sheets.
6 Wall Street scandals (Part I): First the market gets blown up by bankers, and then Wall Street is rescued. Meantime, Main Street mostly got nothing but the invoice for the bailouts. If you don’t think the credit crisis and Great Recession have moved people to stay away from the casino, you are kidding yourself.
Many people believe the game is rigged against them. They aren’t conspiracy nuts, they are merely observing what has been going on since 2007. At the very least, it appears that bankers have corrupted the political process for their own gains. Investors are wondering why they should participate in such an absurd environment.
7 Trendless economy and markets: The economy has been operating just above stall speed. Manufacturing has been strong, employment has not, wages are flat and retail spending unremarkable. This soft economy does not get investors fired up about putting risk capital to work. And a range-bound market simply makes trading too challenging for most participants. Paying fees for zero returns, as we saw in 2011, isn’t very encouraging, either.
8 Bank scandals (Part II): Think about the recent scandals at various banks and investment firms. MF Global, Peregrine Financial, Knight Trading, Standard Charter and JPMorgan Chase — yet another set of factors that are persuading investors to stay away. Theft and incompetency appear rampant, and ethical transgressions seem to be part of ordinary business. Why on Earth should anyone entrust hard-earned money to those guys?
9 High frequency trading: Investing is a zero-sum game. The gains that the high-frequency traders have taken come right off the bottom line for anyone with a pension or retirement account. The complexity may be beyond the average investor’s comprehension, but the impact is not. People can smell when they are being ripped off, and you can blame the exchanges and high-frequency trades for that.
Some people seem to have wised up to the stock-picking game. It was certainly fun while it was working during the rampaging bull market, but that has been over for years. When correlations go to 1, stock picking no longer matters. Add to that the advantages of lower costs, fees, taxes and turnovers, and the traditional stock-picking approach looks like a fool’s errand.
Does the average Main Street mom-and-pop investor think these things matter? I believe they do, and that is why so many investors have voted with their feet.
Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. On Twitter: @Ritholtz