Even though the Dow Jones industrial average has risen 3 percent since it topped its previous all-time high March 5, individual investors remain reluctant to join the party despite the bullish sentiment of the so-called smart money -- pension funds, mutual funds and other institutional investors.
More than 3 out of 4 Americans surveyed early this month by Bankrate.com said they were not more inclined to invest in stocks despite record low yields on savings accounts and certificates of deposit.
A survey conducted in January by Franklin Templeton revealed that -- right or wrong -- 37 percent of U.S. investors do not think stocks are essential to meeting their long-term investment goals. Surprisingly, 31 percent of U.S. investors thought stocks were flat or down last year despite the fact that the S&P 500, a broader measure of the market's health than the Dow, advanced 16 percent.
In contrast, Barron's reported last week that 74 percent of institutional investment managers are bullish, the highest level in more than 20 years.
Professional investors appreciate what improving corporate earnings and slow but steady economic growth are doing for the stock market. They also understand that the Federal Reserve's policy to stimulate the economy by keeping interest rates at record low levels drives investors looking for more than paltry returns into stocks. That's made many professional investors adopt a "risk on" strategy compared to the "risk off" strategy many individual investors are pursuing.
Retail investors are still bearing scars from the market's 2008 collapse. When Mark Luschini speaks to them, they appear to understand that things are improving, but they are not ready to act on it.
"When I talk about the economy and the fact that we've had 15 consecutive quarters of economic growth, I can see on their faces that they hear me, they believe me, but it doesn't feel that way to them," said Mr. Luschini, chief investment strategist for Janney Montgomery Scott.
There's one more thing about institutional investors that makes them different from individual investors. They are paid to invest, so staying out of the stock market is not an option for those charged with managing diversified portfolios. Skittish individuals, on the other hand, can shun stocks and stash their money in low-risk investments.
"They say it's not worth the risk," said Christopher Wiles of Rockhaven Capital Management in Mt. Lebanon. "It's hard for retail investors. Who do you trust? What do you trust?"
What little stock buying individuals have done largely has been limited to dividend-paying stocks sought by investors who are looking for a little more yield than bonds and other fixed income investments offer.
"It is not an avalanche. People are not all in," said Federated Investors president and CEO J. Christopher Donahue.
Mr. Donahue believes the lack of individual investor participation in the rally means that it has a way to go.
What will it take for more individuals to jump in? More confidence on the part of companies and better, more consistent news on the jobs front, said Ronald Heakins of OakTree Investment Advisors in Shadyside.
"Employment has got to improve dramatically to the point where employees are confident in their ability to move from one job to another," he said.
Mr. Heakins is forecasting a continued run of what he calls "yo-yo years" in which the economy and stock market alternate between moving a little up and a little down. For that reason, he expects it could take three years or longer for the economy to improve enough for individual investors to get over their jitters.
Franklin Templeton senior vice president David McSpadden said it is not surprising that investors remain so wary and uncertain. He thinks they may be looking too much at the market's volatility over the last few years rather than its general direction.
"If the market isn't quite a volatile as it's been in the past, that will help," Mr. McSpadden said. "The challenge is getting people to move contrary to where their emotions are directing them."
Mr. Luschini believes that higher interest rates could cause enough pain in the bond market, a refuge for investors in recent years, to coax individuals back to stocks. Bond prices move in the opposite direction of interest rates, and for months many have been warning of a bear market for bonds.
So far, "there's no impetus for [bond investors] to change their mind," Mr. Luschini said.
Even though Mr. Wiles believes Fed policy has artificially inflated stock prices, he believes "you're kind of stupid not to play along."
It's "a crazy market to bet against because of the liquidity. But from a valuation standpoint, it makes no sense," he said.
In a blog post last week, Mr. Wiles compared the market rally to a party.
"This party's getting a little out of hand. I'm still here, but I've grabbed my jacket and I'm hanging out on the porch," he wrote.
Asked in an interview why he's on the porch, Mr. Wiles said: "You kind of want to be at the party, but you want to be able to see the flashing lights of the police car coming over the hill."
Len Boselovic: firstname.lastname@example.org or 412-263-1941.