Household Investors Shun Stocks… Except In Bubbles
Since the 1950s, household investors have played a declining role in the U.S. stock market. According to Census data, the household sector has shrunk its equity holdings as a share of the overall market from about 90 percent in 1952 to around 35 percent in 2010. Of course, households also have an interest in equities through their stakes in mutual, retirement, and pension funds, which accounted for another 37 percent of the market in 2010. According to Gallup, 56 percent of Americans reported having some stake in the stock market in 2010, but that’s down from a peak of 67 percent in 2002. By 2013, the number had dropped to 52 percent.
While the declining trend in households’ share of the stock market has been persistent, there have been a few years when households increased their share—some that stand out are 1986, 1988, 1999, and 2006.
Do you see a pattern? Each year preceded a major stock market crash—Black Monday happened in 1987, the Friday the Thirteenth crash was in 1989, the dot com bubble burst in 2000, and the financial crisis hit in 2007. In fact, the only time since 1980 that a significant increase in the household sector’s share of the stock market wasn’t followed by a crash was in 1991.
Of course, the conventional wisdom is that everybody jumps into the stock market before a bubble bursts—that’s what makes it a bubble. But these data tell us that households jump in more aggressively than other types of investors, to the extent that they actually increase their overall share of the market relative to other investors. That also suggests they share a greater proportion of the losses when the bubble bursts.
At the same time that households were increasing their positions, other types of investors were reducing their exposure to the stock market. So who’s timing the bubble better than households?
Of significant investor categories, insurance companies and retirement/pension funds were reducing their share of the stock market in 1986, 1988, 1999, and 2006, opposite to the behavior of households.
Of course, households have a stake in retirement and pension funds, but they’re not making direct decisions about when to buy and sell stocks.
So what do these results indicate? Do household investors wait too long to go all-in on a market rally? Is their surging participation the proverbial straw that breaks the back of the market? It’s hard to say, because correlations in the data don’t always indicate causality. But if the experience of the last 30 years is a guide, when the household sector increases its share of the stock market relative to other types of investors, it may be time to look for a major correction.