Risk-taking is an important component of an economic recovery, as it unlocks spending and investment power that is pent up during a downturn. But two and a half years since the US recession ended, individual investors are still playing it safe.
Even the recent upturn in US mutual funds didn’t mark a shift in risk appetites. In January, mutual fund inflows reached $35.6 billion, breaking a seven-month streak of outflows, according to the Investment Company Institute (ICI), the national association of US investment companies.
But that offset only a little more than a third of $100 billion of outflows during the last six months of 2011. Individual investors continue to pump money into safer fixed-income funds while steering clear of stocks. Equity mutual fund flows were flat in January, after outflows of $150 billion in the second half of 2011.
Better economic growth prospects, improved consumer confidence, job market gains and a strong rebound in equity prices have done little to whet risk appetites. For individual investors, cash is still king. The Federal Reserve’s fourth-quarter Flow of Funds report shows that at the end of 2011, US households held a record $8.2 trillion in cash deposits, including checking accounts, time and savings deposits, and money-market funds. Near-zero yields didn’t seem to bother them.
Household deposit holdings now exceed equity holdings, something I’ve only seen twice in the past 15 years—after equity markets plunged in 2001 and 2008. Today, households are sticking with cash after stocks have gained over 20% in the past five months and nearly 50% since the summer of 2009 when the recession ended. At the same point in the previous economic recovery, equity mutual fund flows turned positive even though stock prices were still below the level when the recovery started.
Of course, investors are still scarred by the equity market crash in 2008 and 2009. Unusually high market volatility has created another deterrent for nervous investors. And there’s a maze of geopolitical risks to navigate, as well as the upcoming elections and possible changes in the tax code that could affect returns on financial assets.
Perhaps this explains why 31% of all US households said they were unwilling to take any risk at all, according to a recent ICI survey. That inclination was little changed from readings during the stock market crisis in 2008 (33%) and the subsequent rally in 2009 (29%).
However, as the economy continues to expand and seemingly intractable problems get resolved, we expect investor confidence to slowly and steadily recover. This has broader implications for the economy. When cash sitting on the sidelines begins to get redeployed in risky assets, it often reflects a fundamental shift in risk-taking attitudes as well, as people begin to spend more on big-ticket items or invest more in other areas, such as real estate.
Although that process has been dampened so far in this recovery, we believe that more signs of improvement in the US economy will ultimately support a shift in risk-taking, which will create a virtuous circle by helping to underpin even stronger growth.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Joseph G. Carson is US Economist and Director of Global Economic Research at Alliance Bernstein.