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June 09, 2014 at 10:31 AM
Last year, we noted that there was a “Bubble in Bubble Calling.” News media bubble chatter was the rage, whether it was tech initial public offerings or stocks or bonds — all caused by “a global central bank QE bubble.”
Here we are two quarters later, with the central bank reducing quantitative easing by scaling back its asset purchases. Markets have reached new highs, which is a highly bullish sign. The jobs lost in the great recession have been recovered, and economic data continues to trend positive.
Despite this, we still hear bubble chatter. Yet when we look at what individuals are doing with their investments, their behavior is definitely bearish. According to a study published in the Financial Analysts Journal, equity ownership has fallen to the lowest level in more than a half-century. In 2012, investors held a mere 37.7 percent of their portfolios in equities. That was out of a grand total of $90.6 trillion in investable assets around the world.
Over the past three decades, U.S. investors’ portfolio equity exposure has run at a historical average of about 60 percent. Think of this as the classic 60/40 stock-bond allocation.
In the early 1980s, investors reduced their equity exposure to just 45 percent. In the late 1990s, it rose to 75 percent and higher. A 15 percentage-point swing in either direction is an indication of extreme sentiment. Savvy contrarians can make a bet in the opposite direction with a high degree of confidence.
Today, the equity allocation is a modestly elevated 65.3 percent among the 150,000 members of the American Association of Individual Investor, which tracks individual investor behavior. Given last year’s 30 percent gain in the Standard & Poor’s 500 Index, it is reasonable to guess that much of this increase was from price appreciation in existing equity holdings, and not due to a newfound love of stocks. Meaning, we are not seeing the sorts of sentiment moves that indicate a bubble.
This is confirmed by other data sources. As of May 2014, investors’ cash allocations had risen to an eight-month high while equity exposure had actually fallen to a six-month low, according to AAII. And, the survey data is confirmed by other data from the quantitative team at Bank of America Merrill Lynch, which tracks the money flow of the firm’s clients. Their clients have been net sellers of equities during the last few months.
