The old adage for why the stock market is up on a given day simply says, “there were more buyers than sellers.”

Over time, more buyers than sellers allocating to stocks made it the preferred savings vehicle of households; but it was not always this way.

The chart below adds up all of the money households invested in stocks each year since 1951.  It considers individual stocks, ETFs, mutual funds, and equities held by pension plans.  It divides this number by the total financial assets (stocks, bonds, cash, CDs, etc.) for households.  This is the effective exposure households invested in stocks.

graph 2

Back in the 1980s, stocks had to compete with the interest rates offered by banks on CDs.  A guaranteed return of 15% sounded pretty good in 1982.  This was especially compelling since stocks had moved roughly sideways since 1966.

Stocks eventually became much easier to buy, and the flow of information was faster.  Rather than putting money in the bank, individuals first save with 401(k) plans where money invariably funnels into mutual funds with stock exposure.

It is probably more relevant to look at the post 1994 era for when stocks became the de facto savings vehicle.  This was when the 401(k) plan rose to popularity at the same time the largest generation began to enter peak earnings years.  During this time, the household allocation was as high as 64% and as low as 31%.  The latest reading, reported with a lag as of the end of March 2017, is 53%.   We estimate that the data comes in at about 54.4% today given the positive return for stocks in the 2nd quarter.


No one is pounding the table saying “stocks are cheap” today.  Yet overall households are positioned with above average equity allocations. This does not mean stocks must fall.  It does mean that expectations should be lower than history and certainly lower for returns than the last eight years.

Arguably, over time, the return investors require to own stocks over bonds (known as the equity risk premium) might actually fall. An even greater percentage of people could eschew bank accounts in favor of stocks.  With technology, it could become even easier in the future to buy stocks (“Alexa, buy me XYZ company stock.”). If any of these ideas prove true, the average allocations would theoretically trend higher over time, along with valuations.

It’s an unavoidable truth: Markets need more buyers than sellers to push prices higher.  Historically, few households were willing to push allocations up from here. We must never say those four infamous words of investing, “This time is different.”  It is important to have an open mind, but we are tempering future return expectations from the current levels.


This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.