This bull market has climbed a major “wall of worry” for more than four years. After the traumatic crisis of 2008, most private investors and investment advisors still seem battle-scarred.
According to Gallup’s latest figures, only 52% of Americans now say they own stock, outright or in mutual funds or retirement accounts, the lowest figure since at least 1998 and well below the 65% level back in 2007.
Last week, a study published in the Journal of Financial Therapy said that 93% of financial advisors have suffered from a form of post-traumatic stress disorder (PTSD) after the market bloodbath of 2008. Brad Klontz, an associate professor at Kansas State University and co-author of the study, said, “a lot of these financial planners I worked with couldn’t sleep at night.”
Another survey by Curian Capital Asset Management found that after 2008, 63% of over 1,000 independent financial advisers began switching to tactical asset-allocation strategies in an attempt to avoid another market crisis.
Essentially, I view 2008 as a “Black Swan” event in which most institutions seemed to be on one side of the same highly-leveraged trade. In the final four months of 2008, it was estimated that at least $1 trillion in municipal and corporate debt was forced to be sold as this leveraged debt came unwound.
Naturally, fixed income traders then adopted wide bid/ask spreads and picked off everybody that was forced to sell. When the Credit Default Swap (CDS) market collapsed, the Fed had to step in and rescue the commercial paper market, the mortgage backed security market, and big banks that were deemed too big to fail. In the end, leveraged debt blew up in 2008 and the bond market essentially took out the stock market.
With so many investors still so cautious, the good news is that there is no general “euphoria” around the recent new record highs in the S&P, Dow, and Russell indexes. That means there is a good chance that the market can keep rising as more battle-scarred investors finally dip their toes back into the rising market.