From the desk of Willie Delwiche.
Key Takeaway: There is abundant focus on weekly and monthly surveys showing evidence of investor pessimism with regard to equities. This is at odds with the strategic positioning indicators showing that stocks are expensive and households are historically over-exposed to equities (relative to bonds, but also relative to bonds plus cash). The last two times that II bears exceeded bulls (in 2019 and 2020), household asset allocation data showed only 53% exposure to equities. As of the end of 2021, it was at 62%, an all-time high. So while investors may be identifying themselves as bearish, there is little evidence that investable cash is on the sidelines. With the Fed now raising rates and the market re-considering valuation levels, this lack of available firepower could weigh on equities. Whether today’s pessimism represents a cyclical extreme remains to be seen.
Sentiment Report Chart of the Week: Household Equity Exposure Hits New High
US households finished 2021 with their highest level of equity exposure on record. Households had 62% exposure to stocks, 16% exposure to bonds and 22% exposure to cash.This is quarterly data, meaning it doesn’t reflect changes in market value or fund flows that have occurred this year. Nonetheless, there is a strong inverse relationship between equity market exposure (relative to bonds) and forward returns for the S&P 500 that goes back to the 1950s. If this relationship holds going forward, stock market returns could be disappointing for an investing public that has gone all in for equities.
