Stock Allocations Breach Dot-Com Bubble Highs

Overall equity allocations are at a record high.

That probably won’t surprise anyone. After all, where else would you put your money?

Remember, there’s no conspiracy afoot, or at least not if “conspiracy” is supposed to denote something clandestine. Critics of post-GFC monetary policy habitually imply the existence of a secret plan, but as I often joke, if this was supposed to be some kind of a closely-held secret that only central bankers knew about, Ben Bernanke is the worst co-conspirator in the world. I don’t want to be in a “conspiracy” with a guy who writes OpEds called “What We Did And Why.”

Although every intended (and unintended) consequence of ultra-accommodative monetary policy hasn’t been spelled out explicitly by policymakers, you needn’t have any special training to understand the concepts. Investors have been pushed out the risk curve and down the quality ladder for a dozen years and here we are.

Where is “here”? Well, “here” is illustrated in the figure (below).

Households, mutual funds, pension funds and foreign investors together own around 85% of the US equity market. As Goldman’s David Kostin wrote in his latest, those four categories “currently allocate 52% of their aggregate financial assets to equities, surpassing the previous record high of 51% set during the Tech Bubble in 2000.”

Your first instinct might be to suggest that’s foreboding. And you may be right. But, if you ask Goldman, the combined allocation to stocks will climb even higher next year. And there’s no mystery as to why.

“When allocating capital, the alternatives to equities appear unattractive,” Kostin wrote, noting that “cash yields essentially nothing, and is likely to remain at the lower bound for the next year.” As for fixed income, Goldman sees 10-year US yields, IG spreads and HY spreads at 1.80%, 97bps and 360bps, respectively, in 12 months, but as Kostin dryly wrote, those levels are “also unappealing.” In fact, he said, cash, Treasurys, IG and HY credit rank in just the 1st, 7th, 5th and 11th percentiles since 1996.

Meanwhile, the Fed model shows the earnings yield gap versus 10-year Treasurys is above average and almost two-thirds of S&P 500 stocks sport an annualized dividend yield higher than the IG index.

Clearly, 2021 has been a banner year for equity inflows. You might suggest, as one bank did last week, that inflows have slowed to a trickle (figure below).

The four-week moving average of inflows to global equity funds dropped below $3 billion last week after rising as high as $42 billion in March.

But even if flows do decelerate into year-end, it’s worth noting the obvious: That chart is hopelessly skewed by the large outflow during the week ended September 22 (figure below).

With the prior week’s huge inflow dropping out of the sample, the average was virtually guaranteed to plummet this week. Global equity funds have enjoyed three consecutive weekly inflows following the year’s first outflow.

US equities have similarly logged three consecutive weekly inflows, and as Goldman’s Kostin reminded folks, “US ETF and mutual fund net inflows YTD are the highest in any year since at least 2001 [and] the ratio of equity to bond inflows in the US is near a record high.”

Household net equity demand should be around $200 billion in 2022 on Goldman’s estimates (figure below).

At 47%, household stock allocations are already above the all-time high set during Q1 of 2000. Amid the deluge of inflows illustrated above, household equity demand annualized $848 billion in the first half of this year, more than five times the five-year average.

Obviously, that isn’t sustainable, and although a loss of economic momentum in the US may weigh on demand in 2022, Goldman reckoned that the $14 trillion in cash assets currently held by households “will provide a tailwind.”

According to Bloomberg Economics, the total excess savings accumulated since the onset of the pandemic sums to $2.3 trillion in the US and nearly 400 billion euros across the pond.