Americans increasingly spurn stocks ...

In my last post I talked about how Americans were increasingly funding their own govt debt and relying less on foreigners to purchase their bonds. One consequence of this is that Americans are getting out of the stock market in droves turning to US govt bonds instead. This is good news for the US govt who needs to fund its debt, but bad news for those still in the stock market. Graham Bowley from the NY Times points out that:

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.

If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked. ...

One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.

So is the timing. After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments.

Bowley points out that the effect on the stock market on uncertainty is similar to the effect on the housing market. Losses on property are likely to make investors wary of housing in the US for some time. Americans are also increasingly wary of investing in the stock market for their pension savings (401(k)s in the US or super in Australia)

Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.