Household Equity Ownership Percentage vs. Subsequent Rolling 10-Year S&P 500 Index Total Returns

This next chart shows that household equity ownership percentage has a high correlation with future annualized returns.

Here’s how you read the chart:

• Think in terms of buying power. If individuals are fully invested in stocks, how much more money do they have available to buy more stocks? More buyers than sellers pushes prices higher. More sellers than buyers pushes prices lower.

• Of course there are other buyers and sellers: institutions, corporations, and foreign investors (and now even government central banks). Just stick with us at this point.

• The blue line tracks the percentage of total household financial assets that are equity investments, including mutual funds and pensions.

• Take a look at the top red arrow. At the market top in March 2000, the high level of equity ownership was forecasting a return of -3% annualized over the coming 10 years.

• The black dotted line plots total return over the subsequent 10 years, on a rolling basis.

• Again, focus in on 2000. The dotted black line shows that total return over the following 10 years turned out to be approximately -1%.