An unwillingness to play in the stock market has pushed many average investors to the exteme ends of the spectrum: They're either putting money in zero-paying cash accounts or risky commodity plays.
Volume on the New York Stock Exchange has slipped to an 11-year low as investors fret over a dizzying array of cross-currents, from the disaster in Japan to the financial mess in Washington.
Those in stocks are primarily buyers, sending the market on a perpetually slow trudge higher. But risking that the rally will continue is too much for investors unwilling both to bet on a move lower or stand in the way of additional pushes to the upside.
Part of that trend has manifested itself in commodities, where virtually everything—metals, grains, energy—has risen unabated as the US dollar drops and concerns escalate that Federal Reserve policy is paving the way for significant inflation down the road.
"Money goes where it's best-treated," says Quincy Krosby, chief strategist at Prudential Financial in Newark, N.J. "Probably for the market, the biggest worry is domestic and what the Federal Reserve is going to do and say. The traders believe that the Fed isn't done."
Fed policy is critical as the central bank unwinds its program of quantitative easing, in which it purchases government securities in an effort to provide liquidity to large buyers of risk assets like stocks.
However, as the program has continued it also has generated inflation fearsas all that money circulates through the economy, diminishing the value of the dollar and consequently driving up commodity prices, which are valued in the US currency.
The Fed effects have created opportunities for investors who worry that the stock market is too unreliable a place to put their money.
But it's also created an environment of uncertainty where many are willing simply to sit on the sidelines and wait for more stability in the market and economy.
"We've had 10 years where the market has gone nowhere, culminating in '08 and '09, with tremendous volatility," says Philip Silverman, managing partner at Kingsview Management in New York. "People are somewhat shy to put their money back in the market. A lot of people are sitting on cash."
Indeed, by one account more people than ever are simply following the old maxim of placing a higher priority on the return of capital rather than the return on capital.
Total liquid deposits—checking and savings accounts and money markets—were a record high $5.9 trillion in March, according to Market Rates Insight, a financial analysis firm based in San Anselmo, Calif. The firm said that such accounts made up 13 percentage points more of total deposits, to a total of 75 percent, in the past two years, a trend all the more surprising because Fed policies have driven return rates to close to nothing.
"Money is flowing into commodities," Krosby says. "You've got that, but you're also seeing money kept on the sidelines. Investors are content with not losing money."
Even individual investors whose money remains in stocks seem content to ride it out, not selling their positions but also not eager to buy. Judging by recent fund flows, the bulk of the activity seems driven by hedge funds and institutions rather than the retail crowd, which has been expecting for the past seven months a pullback in the markets that it hasn't gotten
"People already have made their bets and they're waiting," says James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "You could have a lot of people who cashed out in February and are waiting for further declines. You could have this Teflon market that already brought people in and they're waiting for the (Standard & Poor's 500) to blow through 1,400."
For those not willing to play cat-and-mouse with the stock market, commodities have been an attractive venue.
Gold continues to make record highs, silver has made generational highs and is pushing toward $40 an ounce and there seems no stopping energy prices, particularly oil. Even in the grains, corn is making another run at its all-time high.
While all those plays seem targeted at Fed-induced inflation expectations, Paulsen thinks the tide may turn soon from that play.
"We're getting pretty close to the end," he says. "How it ends will affect the Fed. If it ends because it will slow the economy, it just postpones Fed tightening. If it sort of burns itself out and the undertow of strength is still there in the economy, it allows the Fed to move up its tightening to before the end of the year."
Where stock-averse investors turn next, then, may well depend on how adept they are at front-running the Fed's position.
If rising commodity prices do not abate, Chairman Ben Bernanke and his dovish allies will have to confront the problem and decide whether controlling inflation is worth risking the stock market rally.
Debt markets have been making their sentiments known in recent weeks, pushing both commodities and five-year inflation expectations as expressed through breakevens—the yield difference between nominal Treasurys and inflation-protected securities—out of a previous trading range.
One other problem the Fed faces is a sporadic trend in which stocks have not risen on weak-dollar days. Wednesday's gains, for instance, were sluggish even though the greenback was down about 0.5 percent late in the day.
"They have to be watching and wondering how they can engineer the commodity prices to come down," Krosby says. "You've seen a number of trading sessions where a weaker dollar didn't lead to a higher market. That's the market's way of saying, 'Thank you, that was helpful, but it's breaking down.'"