To have a thriving market, you need a healthy number of buyers and sellers. At the local farmer's market, you need farmers to grow the tomatoes, lettuce and zucchini and shoppers to buy the produce. Likewise, eBay wouldn't be the world's leading ecommerce company without the millions of people who buy or sell goods online.
What do investors in the stock market need? Trading volume.
After daily trading volumes in the S&P 500 Index hit a high in July 2002, volume quickly declined before leveling off, bouncing between 20 and 30 billion shares on a daily basis for a few years. Since its January 2009 high, daily shares traded have quickly spiraled downward. Today, volume is at a 15-year low, with only 7 billion shares traded.
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Business Insider recently noted how light trading has become, with a "spectacular rally year to date" but "basically no market volume," suggesting that there might not be any interest in actively trading these days.
Investor interest in U.S. markets seems to have eroded as more than $130 billion was withdrawn from equity mutual funds in 2011. Despite the fact that the S&P 500 experienced the best two-month start in more than 20 years, many have continued to temper their excitement.
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In a previous posting, I talked about this feeling of apathy that has stricken investors, which I believe has been driven by a lack of political leadership, excessive regulations and market volatility. When The Economist tackled the issue of U.S. regulations, the magazine pointed out that excessive and badly written rules have negatively affected businesses as they attempt to understand and comply with the rules.
In the chart above, look at the periods that trading volume plummeted. Around the same time in 2002, Sarbanes-Oxley went into effect. In 2010, the Volcker Rule and Dodd-Frank were rolled out. The Economist warns its readers that regulations are suffocating America; they may also be suffocating equity trading.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. None of U.S. Global Investors Funds held any of the securities mentioned in this post as of 12/31/2011.
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