Investors are turning their fear of the economy into an aversion to stocks, avoiding the stock market despite its aggressive recovery from the credit crisis lows, Goldman Sachs' strategist Abby Joseph Cohen told CNBC Monday.
Though major averages have about doubled since the March 2009 lows, retail investors have consistently pulled money out of money market funds and put it not into stocks but rather bonds.
Stock marketvolume has declined substantially as well, thanks in good part to the Flash Crash, an event triggered by high-frequency trading that sent the Dow industrials down nearly 1,000 points in just a few minutes.
Average volume on the New York Stock exchange is down about 25 percent since the event that happened two years ago Sunday.
It's the economic fear that is keeping investors away the most, Cohen, president of Goldman's Global Markets Institute and senior investment strategist, said on CNBC's "Street Signs."
"Overriding has been the fact that we have been through such a difficult time in the economy, when people are still so concerned about job losses, they're concerned about the very sluggish pace of economic activity here in the United States and ongoing recessions elsewhere," she said. "Investors are quite nervous about the equity market."
While the bounceback in the stock market has been helpful, headlines like Friday's weak jobs report and worries about the European debt crisis have kept many sidelined.
Cohen thinks the U.S. economy is in a "deceleration" but "certainly not a recession," with growth in the 2 percent to 2.5 percent range.
"One of the things that will restore the confidence, I believe, will be not just supportive performance in the equity market — we are, in fact, double where prices were at the bottom — but also ongoing improvement in the economy," Cohen said.
Money markets held close to $4 trillion at the pinnacle of the financial crisis, but that total dipped to a post-crisis low of $2.56 trillion last week. However, most of the money is going into bonds, not stocks.
Equity funds for the week ending April 27 saw a rare inflow of funds — $927 million — but even that paled next to the nearly $5.7 billion of inflows to bond funds, according to the Investment Company Institute.
"We had an enormous shock to the economy," Cohen said. "Whether it's in retail spending, what happened to people's savings, what happened to their jobs and so on. This takes a long time to recover."