Stocks are near a four-year high and yet trading volume, at least on the New York Stock Exchange, is at a five-year low.
Not mom-and-pop investors, that’s for sure.
Low volume is largely symptomatic of under-invested portfolio managers who are wisely being cautious with their clients’ money, and retail investors who’ve been slammed by two market crashes in a dozen years.
As for those mom-and-pop investors, low volume is inside baseball.
Trading volume on the NYSE hasn’t been this low since September 2007 and it’s quiet even for August, when vacations typically bring the doldrums. Volume is down about 30% against the five-year average for this month.
Sure, that’s bad for Wall Street — it means less revenue for exchanges like NYSE Euronext (NYSE:NYX) and Nasdaq OMX Group (NASDAQ:NDAQ). It’s also not great for brokerages. From Morgan Stanley (NYSE:MS) to Charles Schwab (NYSE:SCHW) to E*Trade (NASDAQ:ETFC), lower volume means fewer fees and commissions.
And, yes, low volume makes it harder to get a bead on what the market’s doing and where it’s headed — a damn-near impossible task as it is. Technical analysis, for what it’s worth, is based on both changes in prices and volume.
Besides, you don’t need to be a chart-watcher to know that any move on low volume is less meaningful (has “less conviction,” in the words of the chartists), than a high-volume trend. We naturally have more faith in a big sample of traders and investors, as opposed to a small number of hedge funds and high-frequency traders looking to scalp one another for fractions of pennies.
But for retail investors, low volume doesn’t much matter. There’s still ample liquidity for the purposes of mom and pop. It’s not like they can’t buy or sell General Electric (NYSE:GE) or Bank of America (NYSE:BAC) or Coca-Cola (NYSE:KO) when they want, at prices they want.
And we may as well get used to it this way, because there’s little reason to think volume will come back anytime soon. Why should it? A great mass of investors is fed up with stocks and, well, they should be.
We had the dot-com crash of 2000, and 12 years later the Nasdaq is still 40% below its peak. Then, from 2007 to 2009, the S&P 500 fell more than 50% from peak to trough. Sure, it’s almost back to those 2007 levels — five long years later — but loads of folks didn’t stick around for the rebound.
The crash scared investors out of the market at the bottom or darn close. That wealth is gone. Money has been flowing out of domestic stock mutual funds — the way most retail investors participate in the market — and into bond funds and foreign funds for four straight years.
Investors have serious scars, ones which only get rubbed raw when things like the Flash Crash, the Facebook (NASDAQ:FB) IPO fiasco and JPMorgan’s (NYSE:JPM) London Whale trading loss make the capital markets look like the Keystone Cops.
Furthermore, don’t forget that demographics are economics. The Baby Boomers, that cohort of nearly 80 million Americans born between 1946 and 1964, has been the pig in the economic python for decades, and they are rapidly approaching retirement.
The oldest boomers are turning 66 this year. If they’re allocating their assets as they’ve been instructed — that is, shifting more of their portfolios toward bonds and away from stocks as they get older — then naturally that eases demand for equities.
If there’s any cure for low volume, it will be lots of time, a much brighter economic outlook and a long period of rising stock prices. After all, there’s nothing like the allure of rising prices to get people hot for everything from tulip bulbs to houses to tech stocks.
Unfortunately, most money enters a bubble right before it bursts. If it takes another period of irrational exuberance to lift volume back to pre-crisis levels, we’re all better off with things staying sleepy.
As of this writing, Dan Burrows held no positions in the securities mentioned here.