Could Investors Fleeing Stocks Become a Lost Generation?

What will bring the Main Street masses back to Wall Street?

• Jobs. When hiring picks up, so will consumer and investor confidence. With that will come higher stock prices, Paulsen says.

"At this point we have ourselves in such a panic that the only tonic to calm mind-sets is you will need two, three and even four months in a row of 200,000-plus jobs created," Paulsen says. "If we get that, you could see a fairly violent move up in interest rates and stocks. But if jobs don't show, the depression mentality is going to grow."

• A new bull market. Animal spirits will return when the stock market starts heading higher and your neighbor starts bragging about all the money she made in the market, says Michael Farr of money management firm Farr Miller & Washington. More days like Wednesday, when stocks soared 3 percent, are needed.

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"We need a bull market somewhere in something," Farr says. "As soon as the guy next door is making a buck, investors' curiosity will be piqued," and they will regain their courage and start investing in stocks again.

To drive home his point, he uses a casino analogy: "The reason slot machines have ringing bells and flashing lights" to announce a winner is that it "keeps everyone else pulling their handles. You don't have to be the one that wins, you just have to know someone is winning."

• Clarity over government policy. All the question marks on government policy, ranging from taxes to financial regulation, are stifling business decision-making and innovation, Merk argues.

"A key ingredient to functioning markets is clarity," Merk says. "You need to know what the government is up to. But we just don't have that. Investors will come back to the business of investing when investment can take place based on analysis of businesses, rather than anticipating the next government intervention."

• A resurgence of dividends. In a world where yield or income is gaining popularity at the same time that yields on government bonds are sinking to or near record lows, investors will be more apt to return to stocks if companies upped their dividend payouts, argues Jason Trennert of Strategas Research Partners.

"Retail investors have been traumatized by two 50 percent declines in stocks in the past 10 years, serial misdeeds on the part of Corporate America and Wall Street, and for anyone left, the flash crash," he says. "I've come to the conclusion that only dividends could immediately restore some confidence on the part of the investing public in stocks."

Keeping the Bush top tax rate for dividends at 15 percent instead of letting it expire at the end of the year and taxing dividends at a higher rate, would also give investors a reason to stay invested, adds Edward Yardeni of Yardeni Research.

• Single-digit P-Es. It might take a scary stock market swoon that knocks the price-to-earnings ratio back to single-digits to create a truly good entry point for investors, Panzner warns. In prior bear markets, stocks bottomed out in October 1974 at a P-E of 7 and in August 1982 at less than 8, InvesTech Research data show.

Both lows set the market up for big gains over multiyear periods, including the 18-year bull run from 1982 to 2000. The S&P 500's current P-E, based on projected earnings over the next four quarters, is 12.7, according to Thomson Reuters. The long-term P-E is roughly 15.

Getting back to single-digit P-Es is "the best prospect for getting a sustainable recovery," Panzner says. "Stocks have to get so cheap, so washed out and so hated," the only direction is up.

There's one more thing investors like Harris and Woodward would like to see before they would feel comfortable investing aggressively in stocks again: a stiff crackdown by the Securities and Exchange Commission on unscrupulous Wall Street types that prey on individual investors.

Says Woodward: "What would bring me back? Show me that the SEC is back to protecting the little guy."

Adds Harris: "I don't think we want to be in a position again where we have a guy like Bernie Madoff." Madoff orchestrated the biggest Ponzi scheme in history, robbing the financial futures of countless people.

For now, "Everyone is thinking more conservatively," Harris says. "They want to make sure their money is there when they need it."

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