From the desk of Willie Delwiche.
Key Takeaway: There is plenty of talk about investors turning fearful. This is reflected in more bears than bulls on the various sentiment surveys and high demand for puts relative to calls (though this is being distorted by the collapse in call option activity). But from a longer-term perspective, risks to the equity market remain elevated. Stocks are still historically expensive and overowned. Updated data from the Fed this week will clarify how (if at all) the household asset allocation mix shifted in Q1 after finishing 2021 with the highest exposure to stocks versus bonds in history. While the cyclical rise in pessimism may provide enough fuel for bounce attempts and counter-trend rallies, it will be difficult to suggest that a major reset has occurred until stocks are inexpensive and underowned in addition to being unloved.
Sentiment Report Chart of the Week: Equity Exposure Charts A Challenging Path
The Federal Reserve report from which we get the data behind US household asset allocation comes out quarterly, and with a lag. We will finally get Q1 2022 data this week. While quarter-to-quarter shifts are interesting, this data is more about identifying the longer-term environment for equities than anything else. The data shows that historically there has been a strong inverse correlation between exposure to stocks (relative to bonds) and forward returns for the S&P 500. In the past, when households have had heavy exposure to stocks (like they did in 1968 and 2000), the following decade has produced little by way of returns. Periods of relatively light exposure to stocks (like 1991 and 2009) were followed by some of the best 10-year returns in the stock market’s history. When we look back 10 years ago from today, the stock/bond ratio was still low in Q1 2012 (48% stocks, 28% bonds) but beginning to rise. It reached its highest level ever in Q4 of last year (62% stocks, 16% bonds). If the historical pattern holds, S&P 500 returns over the coming decade could fall quite a bit short of what has been experienced over the past decade.