But while stocks represent a larger share of household financial assets than they did five years ago, the share of U.S. adults who own stocks remains stuck at multi-year lows.
At the beginning of September, the Federal Reserve (or Fed) published its 2013 edition of the Survey of Consumer Finances. Even as the S&P 500 was closing in on 1,600 last year, well above its March 2009 lows, the report revealed that the share of U.S. households holding stocks actually declined to 48.8% in 2013 from a high of 53.2% in 2007, as the chart above shows.
Market Realist – The graph above shows the cash held by U.S. households as a percentage of their financial assets. This was estimated by the Federal Reserve in its flow of funds report. During the U.S. financial (XLF) crisis, investors lacked confidence. They avoided stocks and increased their weight in cash. As the U.S. economy recovered, cash holdings decreased. However, there was an uptick in holdings in the first quarter.
The U.S. markets have been in five-year rally, but the share of stocks has declined in the last few years. The share of cash as a proportion of financial assets has been increasing. There have been concerns about overvalued markets. There are concerns that markets are in a bubble. Investors need to keep two indicators in mind while trying to determine whether the markets are in a bubble—valuation metrics and investor sentiment.
The valuation metrics—the like Shiller PE ratio and Tobin’s Q for the markets—are near long-term historical averages. Although the value metrics are elevated, they’re nowhere near the U.S. technology (XLK) bubble burst of 2000 or the housing bubble burst (IYR) of 2007–2008. Also, investor sentiment isn’t irrationally exuberant.
We’ll discuss this more in the later parts of the series.