Joe Weisenthal He shared an interesting chart showing households’ distribution of various financial assets over time:
This chart could be a kind of Rorschach test.
These allocations have been cyclical over time. Ups and downs. Leaders and laggards.
The fact that stocks are leading by such a wide margin may indicate that they are overvalued or possibly poised for a pullback.
It’s also possible that this will be the new normal for stock market dominance as an asset class.
I am so fascinated by the changes in financial market structure over time that I devoted an entire chapter to this topic. Risk and Reward A brief history of household stock market ownership.
For most of the 20th century, the majority of U.S. households were underinvested in stocks. There were various reasons for this: lack of disposable income in the pre-World War II era, high barriers to entry, high costs, and general lack of market knowledge.
It is also true that pensions were more common in the past. Negative everyone had a pension In the past, before defined contribution plans emerged, defined benefit plans accounted for a large portion of retirement savings.
But that doesn’t mean that all retirement plans are heavily invested in stocks. Annuities functioned more as bonds for individuals, but the plans themselves have historically been relatively conservative investors.
Peter Bernstein He discussed this in a 1990s interview with PBS:
When I got into this business in 1951, no one in my generation was interested (in the stock market). Everyone in the market was older… and they knew a lot because they had all survived this terrible experience (1929). And they were all extremely conservative about how to manage money. And there were laws. I mean, in New York you can’t have more than 35 percent personal confidence in stocks. And in some states, you cannot own any stock in any legal trust. There are some situations that are changing right now. The state pension fund must have zero equity capital.
The Great Depression created a generation of risk-averse investors.
We don’t have such a problem anymore.
First it was IRAs and 401ks. Then came online commerce. We now have zero-dollar commissions, robo-advisors, target date funds, Robinhood, and a multitude of platforms that allow you to gamble away your life savings with the push of a button.
Everything is a financial market and the king of them all is the stock market. The United States accounts for only 4% of the world’s population, 25% of global GDP, but 65% of world stock market capitalization.
The stock market is now so important that Bloomberg Eric Balchunas He asks whether the Fed will buy stocks during the next financial crisis:
Eric argues that the stock market is our retirement fund. It is the largest stock exchange in the world (by far). There are more ways than ever to access stocks, so their importance will only increase. Moreover, Japan and China have already done this, and investors assume that the Fed has their back during the crisis.
Many will scoff at this idea. Depending on how bad the next crisis will be, I don’t think that’s a very remote possibility.
No matter what happens in the next crisis, the stock market will remain more important than ever.
Retirees rely on stocks to hedge against inflation. Retirement plans are now predominantly invested in stocks. More youth There is more money in the markets than ever before. Automated investing revolution This means that no matter what is happening in the world, millions of people regularly invest money in the stock market.
The trillion dollar question is; What does moving forward mean?
There are likely to be unintended consequences that no one can yet foresee, but let me give it a try.
Markets are likely to force policymakers’ hands in the future. There will be more flash crash bear markets and corrections going forward.
This all started with the original TARP vote in 2008. The House rejected the $700 billion bailout fund, forcing the stock market’s hand as it fell nearly 9% the next day.
The fact that the stock market fell 35% in a few weeks certainly played a role in the government spending trillions of dollars in such a short time in the early days of Covid.
Tariffs were withdrawn after a rapid 19% drop in the stock market in a few days.
The rise in energy prices played a role in the course of the Iranian conflict.
Investors know that the stock market is more important than ever.
This likely means faster corrections and bear markets than we’ve seen historically.
But make no mistake; The stock market is now in the driver’s seat.
This is the new normal.
Further Reading:
Don’t Fight the Stock Market
