On its front page Monday, The New York Times takes a whack
at a trend that shouldn't surprise anyone that has been paying attention: "Stock Trading Is Still Falling After '08 Crash." This is akin to the constantly recycled surprise that this recovery hasn't behaved like every other post-Depression upturn. Well, no, because the financial crisis was not your ordinary cyclical recession -- it was a financial collapse. Now it's certainly worth noting that "stock trading" has continued to decline, but given years of handwringing from the personal finance media (including said Times) about folks tossing their retirements away on day trading, not to say the uproar over speculative trading on Wall Street, you'd think that this trend would be welcomed. Nope. The failure of stock trading to recover is taken as just another sign of national decline. And, yes, high up in the story appears the paragraph worrying that this just isn't normal, though there's no attempt to consider deeply what "normal" really means when it comes to stocks: "The decline stands in marked contrast to past economic recoveries, when Americans regained their taste for stock trading, within two years of economic shocks in 1987 and 2001."
Let's just focus on the language of that paragraph for a moment. Notice how the Times skips merrily from "past economic recoveries," which suggests a robust collection of historical declines, to 1987 and 2001, the former of which was a stock market crash (and rapid recovery) but not a recession? It's true, 2001 featured both -- the dot-com bust and recession -- but that's the only example the Times can find? Well, there's a reason for that. The Times, and it's not alone, views the past to be roughly the same as the present. But, of course, in the markets -- notably in the equity markets -- that's not the case, just like all people don't resemble Brooklynites. The equity markets, in fact, have been changing rapidly over the last half century; this isn't even 2001 anymore. The Times does get some of those recent changes, adding caveats about investor aversion to risk and volatility, post-2008, and the entrance of "many more players" engaging in high-frequency trading. But these are simply the latest evolution of markets that continue to be viewed popularly as the daily fever chart of American prospects. Justin Schack, at Rosenblatt Securities, who clearly does understand this, offers a carefully couched quote the Times takes as a warning of menace. "When you keep in mind recent history, this is kind of uncharted territory."
In fact, the further you get into this story, the murkier it gets. The Times never bothers to lay out the various parties who participate in the stock market, or how you define "trading." The paper never mentions the huge bucket of indexed assets, a lot of it in retirement funds: Obviously the more shares that are indexed, the less stock trading you'll get. The Times never offers any real breakdown as to who is engaged in trading stocks and what their strategies are -- how some hedge funds dominate HFT, for instance -- beyond some loose and inconclusive speculation about retirees shifting from stocks to bonds. The Times doesn't discuss the large amount of money that seeks private capital: private equity or real estate. It doesn't tell us how much money has gone into overseas shares -- or how much is traded here or there. It particularly fails to give us a sense of two of the most important power bases in the equity-trading world historically: the institutions, mostly pension funds, and individuals.
In fact, the Times makes it seem as if day traders are some vital cog in the financing machine, when in fact their volume is trivial compared to institutional flows, and they've been in decline since equity markets shifted from domination by individuals to institutions in the late '60s. The rise of portfolio theory, the freeing of commissions, the advent of computer technology, the passage of Erisa (and a bit later, the development of defined contribution plans) changed everything. It was a revolution pressed most effectively for and by institutions. It wasn't as if active trading by individuals declined -- discount brokerage made trading cheaper, after all -- it's that trading by larger and larger institutions, including banks, hedge funds and Wall Street firms, exploded. A few things became clear over time. First, individuals, despite computer technology and then the Internet, had a serious disadvantage over professionals and institutions. It was clearly a chump's game. Second, as costs fell, speculation increased and holding periods of stocks declined -- a lot. The market grew riskier in a variety of ways. (And thus the very sensible paradox: More equity investors, individual and institutional, took refuge in indexing.)
A digression: It may well be the case not just that retirees are shifting from stocks to bonds, but that younger generations lack the day-trading habit, maybe because of their own unwillingness to gamble scarce financial resources (which may be buried in their homes), maybe because they realize the odds are so lousy. The bottom line: Active stock trading is not some metric of American economic health. In fact it may be the opposite.
Perhaps the biggest problem with this piece is the confusion it engenders between trading and investment. Day traders are active investors. Holders of 401(k)s, which by volume massively dwarfs day trading, are typically passive investors. Trading tends to be speculative; investing tends to buy and hold. Has the percentage of Americans who hold stocks been falling? How does that compare to trading volumes? There is no doubt that the speculative part of the market has grown by volume over the decades; but from a national perspective, the fate of all those retirement benefits invested in stocks -- as folks have been ordered to do for many years -- is far more vital, particularly given troubles with Social Security and Medicare. Is the percentage of 401(k) money invested in stocks declining? And if it is, where is it going? How have the allocations of defined benefit plans, which are slowly going extinct in terms of new beneficiaries, changed? How does growing income inequality play out here?
In fact, what is the crisis here, beyond that of the exchanges themselves, which have bigger problems (new competition, technology, globalization, the shift to complex synthetic instruments, the rise of emerging markets) than some day traders sensibly turning off their computers? Given the frayed quality of the safety net, ordinary working Americans need their defined contribution plans. What no one seems to want to effectively answer for these folks is how they should invest over a long period of time to insure their retirement, if not in stocks. Real estate isn't the answer. Bonds and government paper won't suffice. You'd still better be careful with emerging-market stocks, particularly right now. The real problem here is not necessarily the underlying economy -- does anyone really think stock markets accurately reflect the state of the real economy? -- but the structure and dynamics of the markets themselves. (That's not to say the real economy is healthy; only that you can't tell by looking at either share prices or "trading.") The stock market is a detector. But it detects what its participants, in all their jostling and competitive diversity, want or need. The stock market of 2012 is not the same stock market of 2001, 1987, 1975, 1933 or 1928. Before we can say anything is worrisome or not, before we can draw any larger conclusions, we need to understand those differences. - Robert Teitelman