Finding a bottom

Unlike housing, which finds a slow bottom over many painful years, stocks are supposed to immediately reflect the current investor sentiment and expectations for the future. Therefore, the stock market's continued decline represents ever increasing pessimism as to the future of the international economy... Or does it?

It is my view that the recent and protracted stock market declines actually represent a growing feeling among Americans, and indeed people world wide, that the stock market may not be an appropriate vessel for retirement savings owing to its volatility and unpredictability. As people continue to reassess their investment options, investors unhappy with their long term returns are deciding in ever increasing numbers that they would rather have their retirement nest egg as money in the bank instead of having it be in play in the stock market.

In fact, the phenomenal and historically uncharacteristic appreciation we have seen in the stock market from the mid 1980s through to the turn of the century may have been the direct result of average people deciding that the stock market was the best place for their retirement savings. It could very well have been this shift of public sentiment that launched the stock market into a generation of spectacular returns. Therefore, what we are seeing now may very well be the unwinding of that trend.

If this is in fact the case, we may experience a protracted period of stock market declines that will be sell-reinforcing. There would also be no guarantee that this money will find its way back into the stock market when the world economic situation improves. In short, it is entirely possible that the stock market is simply adjusting to a size that is more appropriate for people's reduced appetite for stock market risk rather than or in addition to continued economic pessimism.