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Investors' lack of trust may hamper stock market gains

Despite the recent rally, pollsters say many Americans remain deeply worried about the safety of their money and prefer lower-risk investments.

November 28, 2009|By Gail MarksJarvis

Money doesn't show up in the Norman Rockwell scenes around the Thanksgiving table.

But after the stunning stock market losses people were suffering at this time last year, the big gains the market has bestowed since then were bound to come up on some lists of reasons to be thankful this year. Since last Thanksgiving, the stock market has climbed 25%.

Yet for those who closely watch the fate of the money they put into 401(k) accounts and IRAs, the gains of the last 12 months could fail to provide much solace. People who invested money at the start of the decade in the Standard & Poor's 500 index still have 25% less of it, excluding dividends.

And pollsters say that Americans remain deeply worried about their money and mistrustful of Wall Street and the government leaders entrusted to watch over the financial system.

That may weigh on stocks in the future. Many analysts are concerned that the rally is fragile, and cash from individual investors and others is needed to build on it.

After two 50% declines in the stock market in less than a decade, a near miss with a second Great Depression and an unrelenting unemployment rate, "people do not feel safe," said Dennis Jacobe, chief economist for the Gallup polling firm.

"You'd think investors would be on the top of the world after this year's rally," he said. "But as they compare the stock market rally to the economy they are experiencing, there is an atmosphere of unreality."

People feel betrayed as both investors and citizens, Jacobe said: "Wall Street gets theirs and the average American doesn't. There is a sense of unfairness and confusion."

In polls, almost half of Americans said they worry about money "most or all of the time," said analyst Sam Rodgers of the Zogby polling group. And "72% of the American people imagine becoming poor."

The reluctance to trust Wall Street and the stock market has shown up in investing behavior.

During the market downturn between October 2007 and March, investors pulled about $200 billion out of U.S. stock funds, said Vincent Deluard of TrimTabs Investment Research, which tracks flows. And early in the current rally, investors put about $30 billion back into the stock funds. But since then, he said, the money that went into the stock funds has been withdrawn, and investors have preferred relatively lower-risk bond funds, pouring $340 billion into those funds this year.

The skepticism of the stock market is a concern to Wall Street, said Bing Waldert, director of Cerulli Associates, which does research for investment firms. There has been churn in the investment profession as individuals have looked for financial advisors who would keep money safer than they did in the downturn.

According to Cerulli research done in June, 41% of investors said they were dissatisfied with their advisors.

When institutions are fully invested, and many individuals sit it out, it becomes more difficult for the market to continue to climb.

There have been other periods in history when investors withdrew money for a long time, and the market struggled to advance. After the early 1970s bear market, investors pulled money out of mutual funds into the 1980s. After reaching a peak in 1972, the S&P 500 didn't return to that level until 1980.

Jacobe thinks the combination of stock market losses and distrust could keep investors skeptical for a long time.

"People became extremely trusting and thought they could invest without risk," he said. "Now, they are concerned about getting their money returned to them."

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