The stock market is missing you.
For more than three years, ordinary investors disgusted with wild swings have pulled money out of stocks. They have missed a breathtaking bull market: The Dow Jones industrial average has almost doubled from its low point during the Great Recession on March 9, 2009. Corporate America has racked up double-digit profit gains.
But the profit explosion is over, and the Wall Street pros who trade stocks mostly for big institutions and the rich are getting antsy. They’ve been doing the buying. And if Main Street doesn’t join them, the rally could slow or even end.
Everyday investors “are more aware of the risk of the market,’’ says Howard Silverblatt, at Standard & Poor’s. “They’re nervous. They’re scared.’’
The Dow closed above 13,000 last week for the first time since May 2008, four months before the financial crisis. In a sense, the milestone was disappointing: Profits are at a record high, yet the Dow is well below its record of 14,164, set in October 2007.
Individual investors aren’t buying. That shows up in something called the multiple - the ratio of what investors are willing to pay for a company’s stock to its annual profits.
If a stock trades for $100 and the company has made $5 in profit per share, its multiple is a fairly high 20. A higher multiple means more confidence that profits will grow. These days the multiples don’t show much confidence.
Investors are paying a multiple of 13.5 times the past year’s earnings for stocks. The typical multiple over the past 75 years is 16. If that were the multiple today, the Dow would be above 15,000.
The chatter on Wall Street about multiples comes as analysts worry the double-digit profit growth is largely over.
For the first three months this year, profits of companies in the S&P 500 are expected to grow just 0.4 percent over the same period last year, according to FactSet. For all of 2012, they are expected to climb 9 percent. That assumes they will pick up toward the end of the year. That would be a healthy gain but will leave the index short of its record high unless investors get more excited.
The modest profit picture doesn’t necessary doom the rally, though. There have been periods when earnings barely budged yet stocks soared. In the five years through 1986, stocks in the S&P 500 nearly doubled while earnings slipped 2 percent. The explanation is the magic of rising multiples. The average zoomed from nine times earnings to nearly 17 times. Could we be entering a similar period of growing confidence?
Some think so. But Jeffrey Kleintop, at LPL Financial, thinks the market won’t reach a record anytime soon. First, “people need to embrace stocks,’’ he says.
The refusal by ordinary investors to buy stocks is surprising considering the alternatives. CDs, money market funds, and US government debt don’t even throw off enough interest income to offset inflation.