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March 2, 2012

Cover Story: Fear Factor

Volume Outlook Bleak as Investors Shun Stocks

By Peter Chapman

Also in this article

On Wall Street, risk is suddenly a four-letter word. Retail investors can't stomach it. Pension plan sponsors are allocating away from it.

That's bad news for stocks. Volume has been dropping almost nonstop for three years and shows no signs of improvement. The situation is worse than it was following the crash of 2000. It's worse than it was after the crash of 1987. Fearful of the future and still wincing from 2008, investors are moving funds into bonds, commodities, cash, private equity, hedge funds and even foreign securities-anything but U.S. stocks.

"Our bread and butter is the retail investor," Scott Wren, a senior equity strategist at Wells Fargo Advisors, one of the country's four largest retail brokerages, told Bloomberg Radio recently. "They're not jumping into the market. They're not chasing it. Those who have been around for a little bit have been probably burned twice here in the last 10 years or so. They're definitely gun-shy. They're not believers. I'm not sure what it's going to take to get them back in the market."

See Chart: Down Escalator

Their financial advisers aren't sanguine about the U.S. stock market, either. Only 44 percent of them plan to increase their clients' allocations to U.S. stocks this year, according to a recent survey by Investment News. That's down from 63 percent at the start of last year.

Retail investors own about half of all stocks, either directly or indirectly. Institutional investors, both foreign and domestic, own the other half. Both groups operate under different constraints, but both groups are searching for the same thing: a return on their investment.

For most of this century, stocks haven't provided one. The S&P 500 Index registered a 10 percent loss (including dividends) in the first decade of the 21st century, the worst 10-year period ever. Add to that one recession and two financial crises-one in the U.S. and one in Europe-and the idea of risking one's assets in the stock market loses its appeal.

Market Meltdown

Pension plans, which own about 20 percent of all U.S. equities, are following individual investors out the door. As a result of the stock market meltdown, both public and private defined benefit plans are underfunded, as their assets have fallen below their liabilities. And because they must earn a return regardless of stock market conditions in order to pay retiree benefits, they are as worried as retail investors.

Ford Motor Co., for instance, which manages about $60 billion in defined benefit plan assets, now allocates 22 percent to U.S. equities and 20 percent to foreign stocks. It plans to drive the combined figure down to 30 percent "over the next several years," according to its recent 10-K filing.

See Chart: Turning Passive

The big carmaker, whose pension plan is underfunded by $15 billion, plans to allocate more funds to fixed income securities and alternative investments, such as hedge funds and private equity. The goal is to "minimize the volatility of the value of our U.S. pension assets," Ford said in its filing.