Tatton Teaser

Posted 19 June 2024

One of the lesser well-known market indicators is the relationship between US retail investors’ equity ownership (as a percentage of total financial assets) and the future returns of the S&P 500 Index.

Typically, high household equity ownership indicates bullish market sentiment, suggesting equities may have become overvalued leading to lower subsequent returns, or there are few marginal buyers left. Conversely, low household equity ownership indicates bearish sentiment, suggesting equities may be undervalued, with higher future return prospects for investors to re-enter the market.

The latest data from the Federal Reserve show that household equity ownership is in line with the all-time high set in Q4 2021 (41.6%) and has been on an upward trend since the end of the Great Financial Crisis (GFC). This inverse correlation suggests that future returns for the S&P 500 are likely to reduce significantly over future rolling 10-year periods.

High equity ownership can signal market saturation, high valuations, and investor overconfidence with potential mean reversion leading to lower future returns. However, if fiscal policy continues to maintain liquidity and bolster asset prices, and if technological advancements support better economic resilience and higher growth rates, the correlation in the near term may not be as strong as history suggests.

Thank you Dane Harrison for the analysis.

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