I highlight the following chart this week showing how much stocks are owned as a percentage of total household financial assets. The idea is to see if we can get a sense for just how optimistic or pessimistic individual investors are about holding onto stocks.
As you see in the chart, individual investors have a bad habit of buying and selling at the wrong time. Note the highlighted areas in green. They mark periods in time when individuals had a high percentage of assets allocated to stocks. Unfortunately, they also mark major market peak. A large amount of invest-able assets were already in the game.
The red areas show periods when individuals had a low allocation to stocks. Much of the money was moved to the sidelines (cash and money market funds). Available money that would later fuel the next up cycle.
I am concerned that today’s high at 40.8% (stocks as a percentage of household financial assets) is almost as high as it was in 2007 and higher than it was at the end of the secular bull market peak in 1968.
believe it is far better to be an aggressive buyer when everyone is selling and a seller (or hedger) when everyone is buying (like today). Note that the greatest bull market of all time began in 1982. As you see, the record low investment in stocks occurred in the second quarter of that year. As a side: I remember making client calls, as a young Merrill Lynch broker in 1984. I tired to sell stocks to individuals. No one wanted to own stocks. They had been run over by the prior bear market.
I also remember counseling clients the day of and many days after the October 1987 stock market crash. While I’m sure you are rational, most investors are not. Somehow our DNA is not coded correctly.
Today, stocks as a percentage of household financial assets are a fraction away from the 2007 high and higher than the late 1968 early 1969 high and all other highs other than 2000.
U.S. stocks can most certainly go higher and I sure hope they do; however, this current cyclical bull is aged. Beware of today’s high level of optimism, high level of margin debt, high valuations, low trading volume and the record low level of market volatility. It is important to get cautious when everyone is exceedingly bullish just as it is healthy to be aggressive when everyone is in fear.
Crowd Sentiment Poll (my favorite sentiment indicator) is once again in the Extreme Optimism (Bearish) zone. Note red arrow and the poor historical equity market performance when the majority of investors are bullish.
The average value of the indicator at Extreme Optimism (1995 to present) is 68.2. The current reading is 68.9. The average reading at Extreme Pessimism is 46.7. The idea here is that one wants to be a buyer when everyone else is selling (Extreme Pessimism) and a seller when everyone else is buying (Extreme Optimism).
If you are a new reader, the gray area highlights the historical market performance when Investor Sentiment, as measured by Ned Davis Research, moves into the Extreme Optimism (Bearish) Zone (above the dotted black line or a reading of 66).
