We live in a world where most working individuals have some retirement savings invested in the stock market. The stock market funds, in part, college educations, and serve as the primary wealth accumulator for post-baby boom generations. My parents—an elementary school teacher and a furniture salesman—lived in Midwestern frugality and invested their savings from the mid-80’s until 2006 when they pulled out of the market. They retired early, comfortably (so I believe), and largely because of consistent gains in the stock market over a 30 year period. The question is whether this story is repeatable as a viable outcome for working investors now.
The Wall Street Journal ran a story on Monday “Stocks Regain Appeal” documenting the number of dollars flowing into markets from retail investors as well as the anecdotal confidence of investors. The WSJ reports that:
“U.S. stock mutual funds have attracted more cash this year than they have in any year since 2004, according to fund-tracker Lipper. Investors have sent $76 billion into U.S. stock funds in 2013. From 2006 through 2012, they withdrew $451 billion.”
This seems indisputably good right? Maybe. The real question for me is why is more money flowing into the markets and confidence high? Is this behavior driven by information, emotion, or herd mentality? Robert Shiller, recent Nobel Prize winner and author of Irrational Exuberance, wrote in March in a column for the NYT that investors were confident, but who knows why. Shiller’s conclusions were based on data from the cyclically adjusted price-earnings ratio, CAPE, of 23 suggesting that the market was priced high, which is interesting when compared with his data that 74% of individual investors did not think that the market was overpriced. Shiller strengthened his cautionary stance on the market last month when the CAPE held at 23.7, and Shiller warned that stocks were the “most expensive relative to earnings in more than five years.”
This is business law blog, not a market blog, yet the role of the market interests me greatly. As corporate law scholars, we teach students and write about the legal limits, obligations and assumptions that establish the market and dictate how individuals and institutions interact with the market and corresponding corporate-level controls. In 2007 the market collapsed (self-corrected if we want to use the economists’ terms) and what was the result? Dodd-Frank and a series of legislation aimed at policing the market. If we are interested in the laws that govern the market, surely some attention must be paid to how and why the market works the way that it does.
-Anne Tucker