Stock Market Is Losing Its Flock to CDs

What’s wrong with the stock markets these days? At first glance the problem looks like too few buyers and sellers, with little going on aside from the millions of shares that move almost meaninglessly across the tape because of program trading and the fancy maneuvers by Japanese insurance companies to capture dividends.

But beyond buyers and sellers, the markets need believers, they need steady customers.

The problem is the mass of the people are no longer interested. They were scared out of the stock market last October and show no inclination to return. Their money increasingly is invested these days in bank certificates of deposit and in money market mutual funds.

Bank deposits of individual savers--those with accounts under $100,000--went up by $8 billion in January and February, the Federal Reserve Board reported recently. That compared to a $2-billion decline in deposits in the same period last year, when savers pulled their money out of the bank to invest in the then-roaring bull market.

Breach of Faith

Elsewhere the story is the same: In mutual funds, investors are buying the money market funds and short-term bond funds, not those that invest in common stocks. At Philadelphia’s Vanguard Group, the Prime money market fund has grown to $5.1 billion in assets, edging out the company’s stock-investing Windsor Fund.

Why has the public left the stock market? Fear, to begin with--fear about the economy, fear of another crash--but something more as well. Many individual investors have become suspicious of the stock market, convinced that program trading and other Wall Street games have made stock prices unstable and rendered the market an unfit place for the family savings.

That’s no exaggeration--as Wall Street is acknowledging in public attempts to clean up its act. On Tuesday, stock prices rose for the first time in four days because several major brokerage houses announced a halt to stock and index futures trading for their own account. That cheered the market, explained one brokerage vice president, because it showed that industry leaders “realize that investors have been avoiding the market because of volatility”--the wild gyrations of stock prices.

Industry leaders may have realized, too, that they were hurting smaller companies in their own securities business. Last week, regional brokerage firms testified to Congress that the lack of controls on program trading had driven their customers away. Nicholas Brady, head of the presidential commission that investigated the causes of the October crash, also complained about the lack of reforms since then.

More Lucrative Alternatives

Brady and the regional brokers were reminding the big Wall Street houses that the securities markets are an important part of the nation’s economy, and that by turning them into a casino game they were losing public support--as well as customers. Even Las Vegas and Atlantic City know it pays to keep the players in the game.

Still, even if the public accepts Wall Street’s repentance, it may be awhile before investors troop back to the stock market. After all, another reason things are slow on the trading floors is that we’re in a bear market--when the tendency of stock prices is to go down. Unless you believe that tendency will reverse and prices will go up, now is a poor time to invest.

Stocks are not cheap, explains Kenneth Fisher of San Francisco’s Fisher Investments. Selling at 15 times company earnings, the average stock promises you a 6.6% return. And these days you can do as well with a two-month certificate of deposit, and better with a 7% one-year CD.

In that sense, the market’s inactivity is no mystery--trading volumes normally decline in bear markets.

But why are we in a bear market? Because of worries about the ability of the United States to eliminate its budget and trade deficits, worries about the world economy.

More than small investors are concerned. The big pension funds and other institutional investors are sitting on their hands, keeping their holdings short-term, reports Robert Hammond, a vice president of the Goldman Sachs investment firm. Pessimism is both deep and widespread.

Which may seem odd considering that almost every statistic coming out of Washington shows more Americans working than ever before, and the economy bubbling along. Why don’t those statistics impress investors? Because they’re skeptical. They worry because the country is hundreds of billions in hock to foreign nations, and they question whether a government lacking the will to cut the deficit has the guts to take strong measures for the long-term health of the economy.

With the economy, as with the stock markets--the people need a reason to believe.