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Stock Market Cycles

We’ve said for many years that the stock market, like most things in life, runs in cycles.  There are times (such as 2009) when stocks get cheap and our indicators tell us it’s time to be more aggressive.  Other times, we believe it is time to be more conservative and concentrate on preservation of capital.  While we’re far from panic mode when it comes to the stock market, I present the following two charts from Ned Davis Research that indicate we may be closer to the latter.

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

Source: Ned Davis Research

Rolling 10-Year S&P 500 Total Returns And U.S. Household Stock Allocation

Source: Ned Davis Research

The first shows a remarkable correlation between stock allocations among U.S. households and rolling 10-year returns in the stock market.  When investors are pretty fully invested in stocks, the returns looking out 10 years are generally low.  Likewise, when investors are generally fearful of stocks and, therefore, not heavily invested, 10-year returns improve dramatically.  You can see this from the circled total return results from the table below in the second chart.

Additional data from the Federal Reserve also indicates that not only households, but also foreign investors and institutions are currently overweight in stocks.  This has, however, been offset by heavy corporate buying, leaving us with a mild uptrend for the last two years.  This supports our belief that this bull market is in a mature phase.Stacey Wall

Stacey Wall serves as Chief Executive Officer at Pinnacle Trust.  You can reach Stacey by emailing him at swall@pinntrust.com or by calling the office at 601-957-0323.

 

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