Data from the Federal Reserve shows that households finished 2022 with three times as much exposure to stocks as to bonds. It’s not the highest ever (that was Q4 2021, when the stock/bond ratio was approaching four) but it is still in the top 10% of all readings going back more than 70 years.
More Context: Quarterly data isn’t much help when it comes to managing risk and opportunity over the short to intermediate term. But it can be an important indicator of the longer-term market environment. There are few long-term market relationships that have been more stable than household asset allocation positioning and forward stock market returns. There is an 88% inverse correlation between the stock/bond exposure ratio and forward returns for the S&P 500.
In the past, when households have abandoned equities and loaded up on bonds (as was the case in 2009), stock market returns have soared. When they crowded into stocks and ignored bonds (like in the late 60’s and late 90’s), forward returns were sour. Current positioning suggests investors accustomed to the soaring returns of the past decade may need to make a downward adjust to their expectations.
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