Trends in trading volume are useful in confirming overall market health, particularly when they deviate substantially from historical patterns. But in recent years, the prevailing trend in trading activity, even as the market has rallied to new all-time highs, has been less and less. In the first chart below, NASDAQ’s and NYSE’s year-over-year percent change in average daily volume has been plotted by year. Aside from the brief bout of improvement from 2002-2007, the prevailing trend is down.
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With few exceptions average daily volume on the NYSE and NASDAQ increased year after year going back to 1966 and 1979 until just around the last market top in 2007. NYSE peaked at slightly more than 1.6 billions shares in 2006 while NASDAQ actually peaked two years later in 2008 at 2.2 billion shares a day on average. During the last secular bull of 1982 to 2000, NYSE and NASDAQ year-over-year volume declined in just two years, 1988 and 1990. But in the years since the 2000 market top, NYSE volume has fallen in eight years (seven years in a row including 2013), while NASDAQ has fallen in six.
Numerous plausible explanations exist to explain this trend. Demographics is one, there is an increasing number of older Americans every day. The investment industry does suggest being more conservative with investments as one ages and nears retirement age. Another could be tax policy, but for the last decade plus, this year included, it has been quite favorable for capital gains and dividends so this is not so likely. The expansion of exchange-traded funds, mutual funds and private investment funds could also be partly responsible as they all tend to lock up sizable numbers of shares for greater periods of time.
However, the most likely reason is a general lack of confidence in stocks. The NASDAQ crash from 2000-2002 and the financial crisis from 2007-2009 were two massive confidence destroying events. Watching a 401k or IRA account get cut in half or more twice in less than a decade can have long lasting impacts. For far too many, the markets new all-time highs just mean that the market will have further to fall the next time. To change this view, the Fed is going to need to do even more than it is and has already done. But, time does heal most wounds and someday confidence will return and trading activity will likely improve as well.
By Christopher Mistal
