NEW YORK —
People who think the market will snap back to normal are underestimating how much the Great Recession scared investors, said Ulrike Malmendier, an economist who has studied the effect of the Great Depression on attitudes toward stocks.
She said people are ignoring something called the “experience effect,” or the tendency to place great weight on what you most recently went through in deciding how much financial risk to take, even if it runs counter to logic. Extrapolating from her research on “Depression Babies,” the title of a 2010 paper she co-wrote, she said many young investors won’t fully embrace stocks again for another two decades.
“The Great Recession will have a lasting impact beyond what a standard economic model would predict,” said Malmendier, who teaches at the University of California, Berkeley.
She could be wrong, of course. But it’s a measure of the psychological blow from the Great Recession that, more than three years since it ended, big institutions, not just amateur investors, are still trimming stocks.
Public pension funds have cut stocks from 71 percent of their holdings before the recession to 66 percent last year, breaking at least 40 years of generally rising stock allocations, according to “State and Local Pensions: What Now?,” a book by economist Alicia Munnell. They’re shifting money into bonds.
Private pension funds, such as those run by big companies, have cut stocks more: From
70 percent of holdings to just less than 50 percent, back to the 1995 level.
“People aren’t looking to swing for the fences anymore,” said Gary Goldstein, an executive recruiter on Wall Street, referring to the bankers and traders he helps get jobs.
“They’re getting less greedy.”
The lack of greed is remarkable given how much official U.S. policy is designed to stoke it.
When Federal Reserve Chairman Ben Bernanke launched the first of three bond-buying programs four years ago, he said one aim was to drive Treasury yields so low that frustrated investors would feel they had no choice but to take a risk on stocks.
Their buying would push stock prices up, and everyone would be wealthier and spend more. That would help revive the economy.
Sure enough, yields on Treasurys and many other bonds have recently hit record lows, in many cases below the inflation rate. And stock prices have risen.
Yet Americans are pulling out of stocks, so deep is their mistrust of them, and perhaps of the Fed itself.
“Fed policy is trying to suck people into risky assets when they shouldn’t be there,” said Michael Harrington, 58, a former investment fund manager who said he is largely out of stocks. “When this policy fails, as it will, baby boomers will pay the cost in their 401(k)s.”
Ordinary Americans are souring on stocks even though stock prices appear attractive relative to earnings. But history shows they can get more attractive yet.
Stocks in the S&P 500 are trading at 14 times what companies earned per share in the past 12 months. Since 1990, they rarely traded below that level – that is, cheaper, according to S&P Dow Jones Indices.
But that period is unusual. Looking back seven decades to the start of World War II, there were long stretches during which stocks traded below that.