The Tribune Democrat, Johnstown, PA

Business

December 29, 2012

Securities insecurity: Ordinary folks losing confidence in stock market

(Continued)

NEW YORK —

No quick comeback

A Citigroup research report sent to customers concludes that the “cult of equities” that fueled buying in the past has little chance of coming back soon. Investor blogs speculate about the “death of equities,” a line from a famous BusinessWeek cover story in 1979, another time many people had seemingly given up on stocks. Financial analysts lament how the retreat by Main Street has left daily stock trading at low levels.

The investor retreat may already have hurt the fragile economic recovery.

The number of shares traded each day has fallen 40 percent from before the recession to a 12-year low, according to the New York Stock Exchange.

That’s cut into earnings of investment banks and online brokers, which earn fees helping others trade stocks.

Initial public offerings, another source of Wall Street profits, are happening at one-third the rate before the recession.

And old assumptions about stocks are being tested. One investing gospel is that because stocks generally rise in price, companies don’t need to raise their quarterly cash dividends much to attract buyers. But companies are increasing them lately.

Dividends in the S&P 500 rose 11 percent in the 12 months through September, and the number of companies choosing to raise them is the highest in at least 20 years, according to FactSet, a financial data provider. Stocks now throw off more cash in dividends than U.S. government bonds do in interest.

Many on Wall Street think this is an unnatural state that cannot last. After all, people tend to buy stocks because they expect them to rise in price, not because of the dividend. But for much of the history of U.S. stock trading, stocks were considered too risky to be regarded as little more than vehicles for generating dividends. In every year from 1871 through 1958, stocks yielded more in dividends than U.S. bonds did in interest, according to data from Yale economist Robert Shiller – exactly what is happening now.

So maybe that’s normal, and the past five decades were the aberration.

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