Are Stocks Becoming Over-Owned?
With stocks in some sort of consolidation mode at the present time, it is natural for one's thoughts to turn to the big picture. Is this it? Has the bull market finally run out of gas? Are stocks overvalued? Will the economy improve? Have earnings peaked? Is Crimea a real issue? Yada, yada, yada.
The problem with pondering such issues is that even if you do happen to get the answers right, it may not help you stay on the right side of Ms. Market's mood. Remember, stocks can become overvalued and then stay overvalued for YEARS. Overbought conditions and extreme sentiment readings are only negative when a catalyst comes around. As usual in this business, timing matters.
However, understanding where we are in the game can be helpful. Put another way, if an investor can gauge where they are in the stock market's cycle of life, they can adjust their approach accordingly. For example, if you believe that we are in the late stages of a bull market, you can certainly stay in the game and enjoy the ride. However, it might also be a good idea to take your foot off of the gas a bit and play more conservatively.
As we've discussed ad nauseam, stocks have been rising for five years now. The S&P 500 has gained about 180 percent. And given that both the age and the size of this bull market's gain are well above average, it might be a good idea to start playing as if we are in the late stages of the game.
One way to tell whether or not this may be true is by looking at the public's degree of stock ownership. Remember, at bear market bottoms, nobody wants stocks and the percentage of equities owned by households, institutions, and foreigners is quite low. It also follows that when bull markets end, the percentage of equities owned tends to be quite high.
So, while looking at this type of indicator is next-to useless in terms of near-term timing, it can be VERY helpful in trying to get one's bearings from a big-picture perspective.
The Public's Exposure To Stocks Is...
First let's take a look at the level of stock ownership by households in the U.S. as a percentage of total household assets. The idea here is to compare the current level of stock ownership by American households to the peak levels seen in the past.
Where does one obtain such statistics, you ask? The Federal Reserve, of course.
As of 12/31/13, the percentage of stocks (including mutual funds and ETFs) relative to all assets of households in the U.S. was 41.4 percent. Compared to the average since 1952 of 23.6 percent, this would seem pretty darn high.
And compared to the secular bull market peak of 1966, when the reading was 37.9 percent, the current level of 41.4 percent certainly looks high.
However, it is important to keep in mind that mutual funds, IRA's and 401K's didn't really become a thing in American society until the 1980's. So, let's take a look at how the current percentage of equity holdings stacks up in what might be considered modern financial times.
The Death of Equities
In the second quarter of 1982, investors had all but given up on the stock market. The stock market was in the midst of a secular bear market and DJIA hadn't breached the 1,000 mark for nearly two decades. This was about the time that Time or Newsweek (I've since forgotten which one) ran the famous cover with the title "The Death of Equities." Thus, it isn't surprising to learn that equities as a percentage of household assets were at an all-time low of 13.3 percent.
However, this was also right about the time that a rip-roaring secular bull market began. And if memory serves, the stock market marched merrily higher for the next 18 years.
At the first quarter of 2000 and after a gain of 1,330(ish) percent on the DJIA, American's love affair with the stock market was in full swing. Stock ownership as a percentage of household assets had soared to 53.3 percent! And to put this historic run into perspective, at the end of the first Gulf War in 1990, equity ownership had been just 17.7 percent.
So, in the ensuing decade, the American public truly embraced stocks as their primary investment choice. Equity ownership as a percentage of all household assets rose three-fold. And by the time the technology bubble burst in the spring of 2000, equities represented more than half of all household wealth.
The Lost Decade
As you might suspect, equity holdings fell as the bear market of 2000-02 ravaged stocks. Equities as a percentage of household assets fell from 53.3 percent to 31 percent in 2003.
However, the American public, along with their faith in the stock market, is nothing if not resilient. As such, equity holdings had rebounded to 41.1 percent by the second quarter of 2007.
Then the Credit Crisis hit. As 401K's turned into 201K's in the process, the percentage of equity holdings dove proportionately. And by the first quarter of 2009, which also marked the bottom of that brutal bear market, equities represented just 24.2 percent of household assets.
But, as usually happens, the crisis ended and a new bull market began. So, along with the 180 percent gain in the S&P 500 came an increase in household's equity holdings, which went from 24.2 percent to 41.4 percent.
So, what's the takeaway from this history lesson? In short, American households currently hold about the same percentage of stocks that they did in 2007. And while this level is well below the peak seen in 2000 (53.3 percent), it is also the second highest on record.
To be sure, stocks can go higher from here. Remember that bull markets go farther and last longer than most investors can ever imagine. However, it is worth noting that stocks could be starting to become over-owned at the present time. And while this, in and of itself, is NOT a reason to sell, it should be viewed as a sign that this bull market is getting old.
Publishing Note: I have an early meeting on Friday and will not publish a morning report.
Positions in stocks mentioned: SPY
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