Battered Stock Market Depletes Major Investors
Current Problems Shrink Portfolios Over Trillion Dollars
Jul 25, 2009
While not the longest expansion since WW II, it was considerably longer than the 57-month average since then.On the heels of the record 120-month business expansion in the 1990s, the new century had started off with a bang.
By the middle of 2007, however, excessive house foreclosures and latent risks related to a blizzard of securitized high-risk mortgage loans gripped worldwide credit markets, creating a wintry mood of paranoia among financial institutions about lending to one another. Securities markets everywhere started to crumble. In the US, the S&P 500 Index was poised a few points above 1500 in June of 2007, teetering on a slippery slope, before collapsing to 757.13 in the first quarter of 2009.
In This Recession, Two Crises Face Government Officials
By December 2007 the recession had taken over, and arguments that the stock market is a leading indicator of economic activity in the US gained new advocates. It had again correctly called a recession. However, the situation has become unique this time, for the government has dual nemeses in this crisis - first, another cyclical contraction, which many economists say could become severe, compounded by the credit market malaise.
The White House, Federal Reserve and Congress have commenced bailout and stimulus efforts, to crank up the engine again.
Business Contraction Entering 20th Month
By August 2009 the contraction will have entered its 20th month, with the stock market rebounding reluctantly from a loss of nearly half its value. Although certain signs now suggest the bleeding is slowing, it is the longest contraction since 1945, and counting.
The consequential damage to both equity and credit markets presents unique challenges to the money managers at institutional investors as well as individual investors in households.
Specifically, the severity of the deterioration in investment values has caused cash-starved account holders or customers of institutional investors to draw down reserve balances, aggravating institutions' abilities to maneuver in the roiling shoals of global securities markets. Besides wishing to escape the vicissitudes of a turbulent stock market, their customers are selling to raise cash, in these stressful times.
Stock Market Plunge Has Wracked Reserves of Major Investors
According to Federal Reserve flow of funds accounts, since the last quarter of 2007, when the turmoil began in earnest, less than half of institutional, foreign and household stockholders have spent as much money acquiring corporate equities as they have realized through sales.
Those investors buying more are:
- Exchange-traded funds – net buyers by $821.7 billion
- Foreign investors – net buyers by $346.5 billion
- Life insurance companies – net buyers by $269.5 billion
- Property and casualty insurance companies – net buyers by $124.9 billion
On the other hand, investors realizing more value from sales than purchases are:
- Closed-end funds – net sellers by $74.3 billion
- Securities brokers and dealers – net sellers by $144.4 billion
- Mutual funds – net sellers by $387.3 billion
- Households – net sellers by $511.1 billion
- Private pension funds – net sellers by $1,410 billion
As a result of plummeting stock values, every major institutional investor, foreign investor and household saw drastic reductions in their portfolio values, from the final quarter of 2007 through the first quarter of 2009.
They experienced portfolio declines by the magnitudes that follow:
- Property and casualty insurance companies - down 27.1%
- Exchange-traded funds - down 28.0 %
- Life insurance companies - down 40.7%
- Foreign investors - down 42.0%
- Households - down 43.5%
- Private pension funds - down 49.0%
- Mutual funds - down 50.4%
- Closed-end funds - down 52.9%
- Security brokers and dealers - down 66.2%
Where Will Money Come from to Sustain New Bull Market?
This wipeout of stock values conjures up a vital question. Do the Masters of the Universe on Wall Street dream the impossible dream, when they talk about a recovery soon? Or, miraculously, a bull market? Maybe so, for it's difficult to see either happening in the near future.
Investor liquidity is badly hobbled by depleted portfolio values of over $1 trillion, just since 2007; and, new cash contributions to investment accounts undoubtedly will be curtailed by customers with newly-acquired curmudgeon instincts and recession-shrunken billfolds. The question becomes: Where's the money coming from to sustain a new bull market?
*The writer is a Chartered Financial Analyst (CFA).
 |
 |
 |
 |
 |
