It's been popular over the last two years to show how the individual investor is fleeing the stock market. Reputable publications like The Wall Street Journal and The New York Times have run dozens of articles portraying small investors as fed up and cashing out. Nothing gets readers' attention like the feeling that the herd is moving in another direction.
Most of the stories are unconvincing and rely on emotional anecdotes. A story about Mr. Smith cashing out and vowing to never return is only relevant to those who think Mr. Smith makes up the entire stock market. Since he doesn't, we need broad statistics. And even when statistics are used, they are typically incomplete. The state of individual investors, for example, is often gauged using flows in and out of mutual funds -- a dying relic -- while ignoring flows into exchange-traded funds, where most of the action is. Include the latter and it's hard not to conclude that individual investors are still active and widely invested. More on that here.
The latest way to showcase the decline of investors is by pointing to low volume on the New York Stock Exchange. This began last week when Bloomberg noted that NYSE volume is now the lowest since 1999. Several others picked up on the statistic to opine about the market's indolence.
Don't buy it. NYSE volume is declining; that's true. But it's also true that NYSE's market share is falling. Fewer trades are being matched within the NYSE as more are routed to other trading centers within the plumbing of the financial world. Assuming NYSE volume is indicative of the market's total activity is like looking at cassette tape sales and assuming no one listens to music anymore.
Lucky us, NYSE provides data on "consolidated volume," representing trading of all NYSE-listed stocks on both NYSE's floors and external market centers. Here's what it shows:
Yes, total volume is still down from the senseless heights of 2008. As it should be: The world didn't melt down, and people have calmed down. But looking back to a more normal market environment shows today's volume is hardly low. If anything, volume is still high compared with pre-recession years.
It would actually be a positive development for those who continue to invest if masses of investors gave up, packed their bags, and walked out vowing never to return -- that's when the best bargains arrive. But I'm sorry to say, they haven't.