Americans Can't Sell Stocks Fast Enough as Rally Tops Flows
As hard as investors try to wean themselves off stocks, the habit is proving impossible to kick.
In a year when fund clients pulled about $60 billion from equities, the value of shares has climbed by $527 billion, pushing the total owned by households to $20 trillion, data compiled by Bloomberg and Ned Davis Research Inc. show. Today, Americans have 41 percent of their financial assets in stocks, matching the high in 2007 and trailing only the Internet bubble.
It’s testament to the power of a six-year bull market that even as investors were busy cashing in shares and snapping up every bond in sight, the market’s unrelenting appreciation kept swelling their equity holdings. Now, with so much money parked there, some analysts struggle to see where buying will come from to extend an advance already showing signs of fatigue.
“You’ve saturated demand,” said Dan Oshinskie, who helps oversee about $6 billion as chief investment officer at Rothschild Asset Management Inc. in New York. “It doesn’t mean equities can’t continue to rise. What it says is your valuation multiples will have a tough time.”
One lesson of the rally that began in 2009 is that stock prices can go up while individuals are bearish, and that could continue. Scarred by two crashes in less than a decade, investors withdrew almost $50 billion from stock mutual and exchange-traded funds over the last six years, according to data compiled by Bloomberg and the Investment Company Institute.
The withdrawals coincided with one of the biggest bull markets on record, in which $17 trillion of equity value was created as S&P 500 earnings doubled and companies bought back $2 trillion of shares. Those gains overwhelmed fund outflows and pushed the proportion of equity holdings 12 percentage points above the six-decade average of 29 percent.
“In the long term, stock prices and values are going to be driven by the underlying fundamentals,” said John Canally, chief economic strategist at LPL Financial Corp., which oversees $485.4 billion in Boston. “The earnings outlook is not awesome,” he said, “but it’s solid and that’s enough.”
More than $5 billion was withdrawn from U.S. equity ETFs last week, ending three weeks of inflows, data compiled by Bloomberg show.
The outflow from stocks partly reflects investors raising cash at a time when they’re not getting much from bonds, according to Howard Ward, chief investment officer of growth equities at Gamco Investors Inc. Deeper losses in fixed income will make stocks more appealing and the bull market won’t end until stock holdings exceed half of assets, he said.
Asset Rotation
“Capital chases returns and stocks are the only game in town,” said Ward, whose firm oversees $47.5 billion in Rye, New York. “Returns on bond funds will now be turning negative and that should compel investors to reallocate toward stocks.”
Americans already own a lot more stocks than they usually do. At 57 percent, the current holdings relative to bonds and cash are far from their peak at 66 percent in 2000, but they’re approaching levels that have coincided with market peaks in the past. The low was hit in 1982 at 27 percent.
When equity allocation among U.S. households was in the top 20 percentile since 1952, the S&P 500 rose at an annualized rate of 3.5 percent 10 years later, data compiled by Ned Davis show. That’s about one-fifths of the gain when the ratio was at the lowest.
“The challenge with data points like this is, there are only a few historically, so you don’t know if there is a magic level,” said Ed Clissold, U.S. market strategist at Venice, Florida-based Ned Davis. “This trend could go on for a while if the bond market entered a long-term bear. But what it tells you is there is potential for demand to be muted.”
Valuation Argument
Because price appreciation has been behind the growth in stock allocations, arguing that the amount of shares held by households is bearish is similar to saying stocks are vulnerable due to valuations. The S&P 500 trades at 18.6 times profit, 13 percent above its 10-year average.
After two years of almost straight-up appreciation, gains have come harder in 2015, a year in which S&P 500 earnings are forecast to rise 1.2 percent after averaging 15 percent since 2009.
At 2.1 percent, this year’s increase in the S&P 500 represents the worst first-half rally since the bull market began.
“Stocks just aren’t as cheap as they once were a few years back, so you’ve got that headwind, and then you’ve got a headwind of corporate earnings that are still growing but they’re growing at a much slower pace,” said Bob Landry, a portfolio manager who helps oversee $23 billion at USAA Investment Management Co. in San Antonio. “Expectations for future stock returns should be a lot more modest.”
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