Everyone In The (Stock Market) Pool?

Via Dana Lyons' Tumblr,

The percentage of households’  financial assets currently invested in stocks has jumped to levels exceeded only by the 2000 bubble.

Updating one of our favorite data series from the Federal Reserve’s latest Z.1 Release, we see that in the 3rd quarter, household and nonprofit’s stock holdings jumped to 36.3% of their total financial assets. This is the highest percentage since 2000. And, in fact, the only time in the history of the data (since 1945) that saw higher household stock investment than now was during the 1999 to 2000 blow-off phase of the dotcom bubble. Perhaps not everyone is in the pool, but it certainly is extremely crowded.

As we’ve discussed many times, this data series is one of our favorite metrics pertaining to the stock market. It is not necessarily an effective timing tool, but is what we call a “background” indicator. It provides an instructive representation of the longer-term backdrop — and potential — of the stock market. It also serves as an interesting lens into investor psychology. As we wrote in a September 2014 post:

“This is one of our favorite data series because it reveals a lot about not only investment levels but investor psychology as well. When investors have had positive recent experiences in the stock market, i.e., a bull market, they have been happy to pour money into stocks. It is consistent with all of the evidence of performance-chasing pointed out by many.

Note how stock investment peaked with major tops in 1966, 1968, 1972, 2000 and 2007. Of course, investment will rise merely with the appreciation of the market; however, we also observe disproportionate jumps in investment levels near tops as well. Note the spikes at the 1968 and 1972 tops and, most egregiously, at the 2000 top.

On the flip side, when investors have bad recent experiences with stocks, it negatively effects investment flows, and in a more profound way than the positive effect. This is consistent with the scientifically proven notion we’ve discussed before that feelings of fear or loss are much stronger than those of greed or gain. Stock investment during he 1966-82 secular bear market provides a good example of this.

After stock investment peaked at 31% in 1968 (by the way, after many of the indexes had topped in 1966 — investors were still buying the dip), it embarked on steady decline over the next 14 years. This, despite the fact the stock market drifted sideways during that time. By the beginning of the secular bull market in 1982, the S&P 500 was right where it was in 1968. However, household stock investment was at an all-time low of 10.9%. If the stock averages drifted sideways, why did stock investment drop by two thirds? The repeated declines over that period left investors scorned and distrustful of the stock market. They never really started putting money back into stocks until 1991.

What is the significance of the current reading? As we mentioned, it is the highest reading since 2000. Considering the markets are at an all-time high, this should not be surprising. In fact, while most of the indexes surpassed their prior peaks in early 2013, household stock investment did not surpass the 2007 highs until the first (revised to) 2nd quarter of this year (2014). The financial crisis put a dent in many investors’ psyches (along with their portfolios) and they’ve been slow to return again. However, along with market appreciation, investor flows have seen at least streaks of exuberance over the past 18 months, boosting investment levels.

Yes, there is still room to go (less than 6 percentage points now) to reach the bubble highs of 2000. However, one flawed behavioral practice we see time and time again is gauging context and probability based on outlier readings. This is the case in many walks of life from government budgeting to homeowner psychology to analyzing equity valuations. The fact that we are below the highest reading of all-time in stock investment should not lead one’s primary conclusion to be that there is still plenty of room to go to reach those levels.

There are no doubt many investors who are still wary of returning to the stock market due to the two cyclical bear markets in the past dozen years. However, while there may be a certain level of investor mistrust, the moniker of “most hated bull market of all-time” does not seem appropriate. It should not be lost on investors that we are at the second highest level of stock investment ever, behind only the most speculative stock blowoff in U.S. history.”

*  *  *

If you’re interested in the “all-access” version of our charts and research — as well as a daily lens into our investment process — please check out our new site, The Lyons Share. Considering what we believe may be a very difficult investment climate for awhile, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!


Iconoclast421 Sat, 12/09/2017 - 12:51 Permalink

Another 6 months to take out the 2000 peak. And then expect it to go much higher because 2000 didnt have 22 trillion in freshly printed fiat behind it. I wouldnt be surprised if it hits 50%.

Endgame Napoleon Five Star Sat, 12/09/2017 - 14:22 Permalink

How much do they own, and how long do they own it? I am sure it represents a very small percentage of retirement income for the majority of Americans who even own stock.

And that is a minority.

I was once convinced to join a 401k in a 3-month job by a mom who was against the idea of hiring me and had no intention of keeping me, regardless of numbers. Why did she want me in that 401k? Did she get a discount of some sort for signing people up?

It made close to $70. If I had kept it in there, it would have made $280 in a year at that rate of return and a big ol’ $5,600 by retirement after 20 years of contributions—i. e. less than one year’s maximum child tax credit of $6,318 for a part-time-worker mom who also enjoys free or subsidized rent, free groceries, free electricity and monthly cash assistance to go with her yearly tax-welfare check.

The people who can afford stocks have a lot of spare earned income without giving up multiple babyvacations per year, big houses, home renovations and a myriad of other indulgences beyond their major bills. This is usually because of the concentration of the few good-paying jobs under fewer roofs due to assortative mating.

It is interesting that the peak of stock investment — 1968 — aligns with the exact point when women started entering the workforce en mass, concentrating the wealth at the top of the wage scale and diluting wages at the bottom due to the fact that they can work for low pay since they have a spousal income that covers rent, child support that covers rent or layers of monthly welfare that covers rent and food and tax welfare in April that could be spent on stock. But moms prefer to spend the extra, unearned income from governemt to reward sex and reproduction on tattoos, trips to the beach with boyfriends, nail salon jobs and master bedroom furniture.

People working the same low-wage jobs, full time, without any unearned income for womb productivity have to spend every dime they earn on basics. Even then they cannot afford rent in increasing numbers.

Jobs do not pay anything when so many moms with unearned income for womb productivity chase them.

Wonder why when fewer moms worked, more Americans had spare money to invest. I think I know why.

In reply to by Five Star

holgerdanske Sat, 12/09/2017 - 12:52 Permalink

Well, what else can one expect.Untold trillions have been printed, they had to go somewherethey went to stocks, now BC but ultimately they must end up in gold.So there you have it, -- when -- is the 64000$ question!

holgerdanske A1 T Sat, 12/09/2017 - 12:59 Permalink

I bought gold in 2008, right after selling my shares in July 2007.So I was right there, or lucky. The lack of performance in gold makes no sense to me. Ultimately that must be the last and only real refuge, when the crash comes.But, if you are one step ahead of the crowd, you are a hero, but two steps ahead, and you are a crackpot.But ultimately gold will win. When? I have no clue. BC is giving a clue that not all is as rosy as they want us to believe!!  

In reply to by A1 T

Crazy Or Not A1 T Sat, 12/09/2017 - 13:00 Permalink

The crash doesn't wait for you to get bullish, it just blindsides you like a freight train while you're distracted by the huge house you're about to buy in the Hamptons with the proceeds of your blockchain hairdressing franchise.All the delusionals cleaned up in one shitheap, at least Darwin's happy.

In reply to by A1 T

Cloud9.5 Sat, 12/09/2017 - 13:00 Permalink

I am sure the water is fine and you guys are welcome to jump right in.    As for me having lost one fortune, I have no money for the markets. I have invested what little I have in buying the houses that went into foreclosure around me, purchasing my grandchildren’s prepaid college and investing in my kid’s business and acquiring experiences by traveling.  If I am still alive by this summer, and war has not broken out, I plan on standing on the great wall in China. When I lost it all 20 years ago, one of my students made a great observation.  He said, “Mr. C., life consists of two things, the acquisition of things and the acquisition of experiences.  Don’t neglect one for the other.”  The wisdom of innocence is sometimes astounding.

asscannon101 Sat, 12/09/2017 - 13:17 Permalink

Relax! Its all going to be fine because aside from the stock market, those same households are also highly invested in real estate and bitcoin, so they are diversified...

wmbz Sat, 12/09/2017 - 13:32 Permalink

May as well stop looking back. By the time this "thing" has run it's course, and that could be, will be, much, much longer.There will have been nothing else in history to compare it to. Isn't great to be alive to watch our overlords take us into the history books.Winning!

alexcojones Sat, 12/09/2017 - 14:12 Permalink

Quick-! Get into Stocks AND BitCoin in a BIG Way-! Double Down-!Sarc /onFYI- Late November I predicted BitCoin to 25K by Christmas. Looks like I was being conservative.

decon Sat, 12/09/2017 - 14:32 Permalink

Without having details about where the remainder of household money is over time, this metric is rather meaningless.  An investor buys 100 shares of Co. A. Co. A shares are valued 30% more 10 years later and the investors percentage of money invested in stocks has gone up 30%, wow what a coincidence.

venturen Sat, 12/09/2017 - 16:05 Permalink

if you can have Zero Interest Rate....150% of household wealth can be in the stock market. Just print more Bitcoins, dollars, euros....paper the walls with money

Fundies Sat, 12/09/2017 - 16:37 Permalink

Reminds me of the Caddyshack scene.......chocolate bar in the pool. There is certainly a log in the pool now.....but it ain't chocolate.