Let’s be clear, there are valuation metrics, principally the CAPE ratio, which show equity prices in June 2018 are expensive. However, that doesn’t mean you need to mislead by other false bearish narratives. Stocks can have low long-term returns and there can also be wrong bearish arguments. We care about the most accurate arguments which is why as the data evolves and presents new facts, our view of the world evolves with it. If you take a snapshot view of the world and then base all assumptions on that view, without being cognizant of changing dynamics and information, that will likely lead to catastrophic investment returns.
Are Equity Holdings Elevated?
One of the most popular bearish charts is seen below. This chart shows stocks as a percentage of total household financial assets.
Source: charts is seen
The theory is when this ratio is high, it’s a bad time to buy stocks because the ‘dumb money’ is all in. This percentage can go up because investors are buying or simply because prices have soared. Both reasons can be good justifications to sell. The current percentage is bearish because it is the 2nd highest since 1950. Being compared to previous peaks such as the mid-1960s and 2007 isn’t good.
Usually, charts have their numbers right; the problem is there usually is a missing figure which objective analysis can only find. Healthy skepticism can help solve this puzzle. The chart below created by Econompic does an amazing job of poking a hole in the argument presented in the chart above. This chart examines two categories: non-corporate equity and corporate equities plus mutual funds.
Source The chart below
As you can see, non-corporate equity is down significantly while corporate equities and mutual funds are up. The combined total percentage looks less extreme than the previous chart.
Decline In Dynamism Means Less Non-Corporate Equity
