Skeptics point to statistics showing household exposure to the U.S. stock market that is as high as it was at the top of the dot-com bubble, suggesting buyers are maxed out—though the data has some wrinkles. “Exposure” is a function of the overall value of stocks—the two tend to rise and fall in tandem. Saying buying is tapped at current levels is tantamount to saying stocks can’t keep going up because they’ve never been this high before, not always a logical premise.
A look at professional asset allocators shows equity ownership is less stretched. Take the $1.6 trillion hybrid fund industry, where products vary from balanced funds, which maintain a specific mix of equities and bonds, to flexible funds that can put any portion of their assets in stocks, debt or money-market securities. At the end of 2020, the average hybrid allocated 59% to stocks, 31% to bonds and the rest to liquid assets like cash, according to ICI. That’s pretty much in line with their historic average. For context, stock exposure reached 64% in 2004.
It’s unusual to see withdrawals from fixed income—it happened only twice during the past two decades. The stickiness may have to do with the stock market’s tendency to appreciate much faster than bonds during an up cycle, which often leads to an undesirable level of elevated exposure.
For instance, when the S&P 500’s total return reached 51% over the past year while the bond market was broadly flat, a hypothetical portfolio that’s fixed at 60% in stocks and 40% in bonds would have ended up with 70% in stocks, and therefore could be prompted to shift money back to fixed income.
But explosive share gains proved no hurdle during the dot-com boom in the 1990s. Back then, equity funds drew fresh money every year through 2000. Over the stretch, $1.5 trillion flooded into the market, eight times the total for bond funds.
“It comes down to risk—how much risk you are willing or feel comfortable in taking,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. “We recognize that portfolios will likely tilt towards equities and we think that’s a logical starting point, but we don’t see in essence this is the end to bond investing.”
—With assistance from Vildana Hajric.
This article was provided by Bloomberg News.