The market's lack of pop despite such positives reflects a reassessment of risk in the wake of the Internet bubble. The S&P 500 was trading at a price-to-earnings ratio of 37 at the end of June 2001. The ratio was less than 20 three years later, and the market has traded down since then. Not surprisingly, onetime dot-com darlings such as Internet Capital Group ( ICGE) and Priceline.com ( PCLN) are among the worst performers in the past three years. (Conversely, security outfits such as Viisage Technology ( VISG), Magal Security ( MAGS) and Kroll ( KROL), which is being acquired by Marsh & McLennan ( MMC), are among the best performers since 9/11.) As P/Es have come down, the price of oil has risen, although as much as $10 a barrel of the rise may reflect a "terrorism premium." Many analysts also attribute the stock market's relatively lackluster gains in part to investor fears of subsequent terrorist attacks in the U.S. or the oil-rich Middle East. To the surprise of some, such fears persist despite the calm that ultimately prevailed at the Olympic games and Democratic and Republican conventions this summer. "I would have thought that people would be more anesthetized to it by now," said Sam Stovall, chief investment strategist for Standard & Poor's. "But it's always remaining in the background and convincing people to be more conservative."
Indeed, people have poured money into less risky savings accounts in the past few years. At the end of March, investors had $5.5 trillion salted away in bank deposit accounts and money market funds, a more than $1 trillion increase from the end of 2000, according to Federal Reserve data. The value of stocks held by individuals dropped to $5.8 trillion from $7.7 trillion at the end of 2000. The amount of cash flow into bank accounts has been growing steadily since 9/11. In the first quarter of 2004, money poured into deposit accounts at an annualized rate of $631 billion, five times the rate of 1999 and double the rate of 2000 and 2001. Flows out of equities continued, at an annualized rate of minus $330 billion in the first quarter, according to Fed data for direct equity ownership, less than the peak rate of minus $474 billion in 2000. (By contrast, the Investment Company Institute shows inflows into mutual funds totaled $152 billion in 2003 and $128 billion year to date through July -- a far cry from a record $310 billion in 2000, but a marked improvement from outflows of $28 billion in 2002 and a meager $32 billion of inflows in 2001.)