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Household Stock Holdings are at their 2nd-Highest Ever-Behind Only the Dot-Com Era

Who says this is the most-hated bull market in history?

In the third quarter, households and nonprofits held 36.3% of their money in stocks, the second-highest rate ever. The only time this peak was topped occurred in the first quarter of 2000, during the peak of the dot-com bubble, when stockholdings reached 42% of total assets. The lowest level in history occurred in the second quarter of 1982, when only 10.9% of total assets were held in equities, according to Federal Reserve data.

“Perhaps not everyone is in the pool, but it certainly is extremely crowded,” wrote Dana Lyons, a partner at J. Lyons Fund Management, Inc. (Emphasis in original)

Lyons called this Fed statistic, “one of our favorite metrics pertaining to the stock market.” He added that it wasn’t “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.”

He suggested that the data could be viewed as a “lens into investor psychology,” and that it was “consistent with all of the evidence of performance-chasing.” In other words, if investors feel they’ve been rewarded for investing in stocks—and in 2017, gains have been broad based at a time when volatility and pullbacks have basically been nonexistent—they may feel comfortable adding to their positions.

In terms of measuring investor bullishness, this data should be taken with a grain of salt. It comes at a time when U.S. stock indexes like the S&P 500 are trading near record levels, having risen about 20% over the course of the year (some of the market’s most popular stocks and market sectors have gained even more). Those gains will obviously swell the amount allocated to equities in one’s portfolio.

Earlier this year, an article on Advisor Perspectives called this data “statistical noise,” noting that “two of the last three times the purportedly significant 30% level has been reached, stocks gained another 40-60% “

The post added, “Households’ equity ownership proportion mostly reflects the appreciation in the stock market: their equity proportion fell almost in half in the last bear market yet during this time, investors actually added new money to equity funds. The level of households’ assets in equities seems to closely predict high and lows in the stock market because they both measure the exact same thing: the level of the stock market.”

While few see the kinds of euphoria that can presage the end of a bull market, there are signs that investors have been warming up to Wall Street.

In October, Deutsche Bank’s chief international economist said that based on data from the University of Michigan consumer-sentiment report, “U.S. retail investors say that today is the best time ever to invest in the market.” Separately, the Bank of America-Merrill Lynch fund manager survey showed that the average cash balance in portfolios fell to 4.7% in October, the lowest level since May 2015.

Thus far this year, U.S.-listed stock-based exchange-traded funds have seen inflows of more than $308 billion, in what investment expert deemed a “stampede” into such products.