One of the easiest and most convincing arguments that one can make right now is that US investors are abandoning stocks and flocking to the perceived safety of bonds. It is easy to point to the fund flows which show week after consecutive week of outflows for US equity mutual funds and gargantuan positive inflows for bonds.
The chart below shows the stark dichotomy in cumulative flows between equity (both US and foreign) and fixed income funds:
Since January 2007, US retail investors have cashed out an astonishing $262 Billion from domestic equity mutual funds and socked away almost $730 Billion into municipal and taxable bond funds. So it is understandable why someone looking at this chart would start to believe that the fabled US equity culture is over.
But as I wrote late last year, it is too soon to declare an end for the “cult of equities”. If instead we look at the relative holdings of US equities, we see that the average US investor has still got skin in the game. The chart below shows US stock holdings relative to total household financial assets (click to see a larger graph in a new tab):
Even after a brutal and decade long bear market, even after the “Flash Crash” that spooked many of the remaining US retail investors, after all the shenanigans that Wall Street pulled, US investors are still holding above average amounts of equities. Of course, the peak was in the first quarter of 2000, before the tech bubble burst. And there was another peak in late 2007, just before the latest bear market began. But all in all, US investors are hanging tough.
Compare this with the 10 year time span from the 1970’s to the early 1980’s. US relative equity holdings went from a peak of 34% in 1972 to 13.4% in the summer of 1982. This was 3 years after the infamous “Death of Equities” Business Week magazine cover which declared that inflation had killed stocks:
But of course, in 1982 unbenownst to almost everyone, the great bull market had already began. Still, it took longer to heal the damaged psyche of the average US investor than to hurt it in the first place. Relative participation in stock holdings gained ground slowly every year and it finally overtook the peak of the roaring 1960’s bull market in 1998. In contrast, in this cycle US holdings dipped below the 55 year mean just momentarily in late 2008 during the darkest hour of the credit crisis. And since, they have sharply rebounded.
If there is a secular shift taking place, because the sums involved are so vast, the trend in the first chart above would have to continue for a very long time before we see the kind of damage that occurred in the early 1980’s. Of course, we may get there. No one knows the future. But it is more than premature to suddenly declare today the “Death of Equities”. And we may never revisit those lows.
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