Yesterday the Dow Jones crossed above 25,000 for the first time ever, making the trek from the previous millennial level of 24,000 in just 23 day: a record short interval of time. There was just one problem: retail investors refuse to get onboard for the voyage.
Ah yes, retail investors: long beloved on Wall Street because they miss every equity bull market then inevitably join the party too late and serve as the buyers of last resort that soak up the supply of overvalued garbage being dumped by hedge funds, banks and other institutions at end of every bubble. Showing up to the party too late and then riding the crash is just kinda their thing.
As the Wall Street Journal points out this morning, that cycle appears to be repeating itself with the current equity bubble. Well, only the first part, because no matter how high the market rises, retail investors just can't stop selling. In fact, since 2012 retail investors have pulled nearly $1 trillion in capital from U.S.-focused mutual funds.
... even as the S&P has nearly tripled...
Incidentally, this is what we noted at the end of 2017 as the biggest mystery and lingering question on traders' minds: how is it possible that while the cumulative return of the S&P since 2015 been an impressive 34%, equity flows over the same period have been consistently negative?
Aside from corporate buybacks accounting for the bulk of purchases (and central bank purchases of course), we have yet to hear a plausible explanation for how any of this makes sense. Speaking of buybacks, here is the WSJ:
The most dedicated buyer of U.S. shares has been the companies themselves. Corporate stock buybacks started ramping in 2009, hitting a record of $572 billion in 2015, before leveling off, according to data from S&P Dow Jones Indices. With the new tax law cutting the corporate rate to 21% from 35%, many analysts expect companies will use at least some of that cash to buy back more of their own shares.
Meanwhile, no matter what happens, the retail euphoria just isn't there, and as John Fox, chief investment officer at Fenimore Asset Management, notes, Yellen's equity bubble "is the most disliked bull market of my career...No one is excited. This is not like 1999 and 2000, where you went to a bar and CNBC was on TV."
Well, there's a reason why it is "disliked": it is also the most artificial, inorganic "bull market" ever, made possible only thanks to some $20 trillion in central bank liquidity, something which retail investors appears to have grasped.
To be sure, some portion of the mutual fund withdrawals noted above are undoubtedly finding their way back into equities via ETF and direct stock purchases. But no matter how it is spun, recent surveys confirm that American stock ownership is retreating. 62% of Americans reported owning equities, on average, between the fall of the dot-com bubble and the onset of the global financial crisis, between 2001 and 2008, according to a Gallup survey from early 2017. That number shrunk to 54% during the current bull market, from 2009 to 2017.
Not surprisingly, stock ownership is down most among middle-aged investors who got burned by two massive stock market bubbles in 2000 and 2008.
“So when the markets rebounded…there was a segment of the population that was very hesitant to get back in,” said Steven Wagner, chief executive and co-founder of advisory firm Omnia Family Wealth in Aventura, Fla. “People are always shaped by their recent experiences, and much more so by the negative ones.”
Making matters worse, not only is retail not rushing to buy stocks, many aging investors are now actively liquidating and rotating into "safer" assets.
As baby boomers near retirement age, many are paring back positions in riskier equity funds in favor of more stable holdings such as bonds, following the advice of most financial planners.
“I’m 10 years from retirement, so I’m being more cautious,” said Jeffrey Lee Schantz, a 58-year-old architect in Boston, who has put what he considers to be his nest egg into “very conservative investments,” including fixed-income funds.
Meanwhile, younger Americans, who started accumulating income only after the housing bust and financial crisis, never developed an affinity for stocks.
“I’ve always been wary of losing my money on a badly timed purchase or sale of a stock, but now I’d rather not risk losing what little money I have on a misreading of the market,” said Michelle Morley, a 26-year-old model, was a college student during the recession.
Many in the younger generation also appears to have bypassed stocks entirely in lieu of the current "get rich scheme" - cryptos:
College students and other millennials, meanwhile, have found other ways to speculate than buying the latest tech stock. Nate Reutiman, a 20-year-old Boston College student studying marketing and analytics, said he is more interested in cryptocurrencies. Last year, Mr. Reutiman and his roommates discussed contributing $1,000 each to install a mining rig, a system of computers built to find bitcoins, in their dormitory room.
For the best explanation(s) why retail refuses to buy at the top, we go straight to the horse's mouth: their own testimonials.
There's your generic millennial...
... then there is the PTSD sufferer who will likely never get in, no matter what.
... then there are those who find stocks simply too expensive.
... others simply don't want to get burned.
... and finally those who just - correctly - know that the party is about to end and have no desire to be the greatest fools.
* * *
Will this time be any different and will retail hold out until the bitter end? Probably not, in fact, hoarding cash now simply means that retail investors are 'perfectly positioned' to provide that last bit of incremental capital that pushes equities to their absolute peak during the "blow off top" melt up the S&P finds itself in, at some point later this year or next year, just before they crash 50% - according to Jeremy Grantham - and wipe out another generation of savings.