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Investors are loath to return to the market because they remember all too clearly how helpless and exploited they felt on Black Monday. Many stockholders could not reach their brokers and felt whipsawed as they heard on radio and television that large institutions were rushing to dump stock. "Individual investors are still licking their wounds from the crash," says Suresh Sundaresan, professor of finance at Columbia University's School of Business. So far this year the three major stock exchanges have arbitrated more than 3,000 complaint cases between brokers and shareholders, a 66% increase over the same period last year.
Many small investors see the stock market as a clip joint dominated by behind-the-scenes players, a suspicion no doubt aggravated earlier this month when the Securities and Exchange Commission accused Drexel Burnham's junk-bond king, Michael Milken, of teaming up with the now imprisoned arbitrager Ivan Boesky to carry out insider trading and an array of other securities violations. Says a New York City-based financial analyst: "Many people think the stock market is one of the sleaziest enterprises in the world, only slightly better than dope dealing."
Even before Black Monday, many investors worried about the market's wild streak. As computer-driven program trading became commonplace among large institutional investors, which use the strategy to make a quick profit by simultaneously trading huge batches of stocks and related contracts on the futures markets, the market lurched and lunged by more than 100 points a day.
Rising interest rates are also keeping investors away from the stock market. When a two-year U.S. Treasury note earns annual interest of 8.6%, stocks appear exceedingly risky to some. "I can get close to 9% without worrying about all those traders in New York," says Charles Janke, a Houston investor. "You can't beat that." Many individuals are turning to a relatively unusual type of Treasury note: zero-coupon bonds. Like savings bonds but issued in denominations of $1,000 to $5,000, these certificates are sold at a deep discount on their face value at maturity, from six months to 40 years off. A record $5.3 billion worth of zero-coupon Treasury bonds were sold in August, about ten times the volume sold during the same month last year.
Many disillusioned shareholders are looking for an investment over which they can have some control. Last year Peter Hoyt and his wife Peggy sold most of their stock in order to finance a magazine-publishing business venture. "Unless it's your full-time vocation to play around in the market, it's a dangerous game," Hoyt says. At the same time, Hoyt put money into a gold fund as a hedge against inflation or hard times. Says he: "It's almost a vote of confidence that things are going to get worse."