Can The Public Be Apathetic AND Be All-In On Stocks?
Cam Hui | Oct 02, 2014 12:20AM ET
I recently highlighted some figures indicating that the US public was at or near a crowded long in equities (see Lance Roberts showing AAII equity allocations at levels roughly equal the pre-2008 top and cash levels at low extremes roughly equal to the pre-Lehman Crisis lows.
As well, there was the chart from Dana Lyons indicating a similar crowded long reading in US equities:
By contrast, Russ Koesterich of Business Insider ):
During the bull market of the last five years, U.S. stocks, as measured by the S&P 500, have generated total returns of 233%. So, you would think most investors would be embracing equities.h3 Share of US households holding stocks/h3But while stocks represent a larger share of household financial assets than they did five years ago, the share of U.S. adults who own stocks remains stuck at multi-year lows.
As well, Josh Brown recently wrote a post entitled tweeted the following contradictory message:
How can both sets of analysis be true? Can individual investors BOTH be in a crowded long AND be afraid and apathetic about the stock market?
Get The News You Want
The superficial explanation is that while individual investors are long equities, they remain jittery and are quick to bail whenever risk aversion rises. That`s why we have seen frequent short but shallow pullbacks marked by spikes in fear.
I came up with a better explanation once I started to dive into the data. In effect, both assertions are true. The average American remains apathetic and unaware of the bull market while fully invested. That`s because surveys like Gallup are equal weighted, that is to say they survey all Americans, while surveys like the AAII Asset Allocation Survey is more tilted towards a population who matter - those with money.
The Federal Reserve Survey of Consumer Finances is very revealing in that respect. Koesterich pointed out that US household holdings of equities have hardly budged since the Great Financial Crisis, I will use the period from 2007 to the present as my framework for analysis.
The chart below expands on the chart shown by Koesterich above by breaking down the Percent of families with stock holdings by income groupings. For the period from 2007 to 2013, only the top 10% of households saw holdings rise, while all other groups saw their holdings fall. Since outfits like AAII measure overall equity allocations and it's the 10% that have most of the stock holdings, it is no surprise that we see weighted equity holdings rise.
The above chart shows the percentage of households with stock holdings. The chart below shows the median value of stock holdings for households that reported non-zero holdings by income group. First of all, note the disparity in the magnitude of holdings. The value of the holdings of the top 10% group dwarves all other groups, including the next 10% by income.
Since the vertical scale of the above table is a little hard to read as you go down the income group, here is the same data in table form. From 2007 to 2013, only the top decile and the second quartile of households that reported stock holdings saw their median portfolio value increase. Given the pattern shown by the other charts and tables, the gain by the second quartile is likely a statistical anomaly.
Since:
- The top 10% have most of the money;
- Surveys like the AAII Asset Allocation Survey focuses on the people with the money; and
- The bottom 90% appeared to have lost ground in their equity portfolio holdings since 2007
To summarize, this chart from the Fed, which is weighted by dollar invested and not equal weighted by population, tells the story:
My conclusion is the people who matter, i.e. those with the money, are fully invested in equities. By contrast, those who don't have any money are either apathetic or possibly afraid of stocks. There may be further room for more increased public participation by other 90% as the economic recovery strengthens, but that would be a long-shot scenario.
h3 Could public participation widen?/h3Consider the long-term trend in income gains. Neil Irwin , writing in the New York Times, pointed out that the trend has been that income gains have accrued more and more to the top 10%:
In fact, most of the income gains have gone to the top 1%:
This post is not intended to be a discussion about inequality or fairness of how the pie is sliced up. However, given the trends in the post-war era, and the fact that the richest segment of America are already fully invested in equities, do you really want to bet on widening public participation as incremental demand to drive equity prices higher from here?
Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.