U.S. Households finally seduced To Buy equities but is it too late?

As ever, human nature asserts itself in the markets once more in which people take comfort in rising prices and their fellow man entering the stock market. News that Mr & Mrs Main St in the U.S. have returned to the stock market in recent months after the S&P 500 has risen over 102% during the last 4 years, raising their stock holdings to more than 60% of their portfolios, has caused us to raise our eyebrows. It baffles us why contrary to normal business wisdom in which you look to buy low and sell high, that retail investors ALWAYS do the opposite with the stock markets.

It seems that the strong uptrend seen over the last 6 months has finally pushed U.S. households into the market in the hope of recovering the heavy losses they accumulated during the bear market running from 2007 through 2009. There’s nothing wrong with either an the increase in confidence and ordinary investor bullishness but, given the recent run higher and so the point at which we currently sit with the newfound confidence, we should be wary of this bullishness.

The preferred investment vehicle of U.S. households to get a share of the stock market is mutual funds. During the period running from 2007 till the end of 2012, Americans pulled out $445 billion from these funds but have now thrown $36 billion in since the start of this year in what may be a reversal in investing trends going forward, and in particular away from bond funds.

Many households were scared away from the market during the peak of the financial crisis between 2007 and 2009. The hefty losses the S&P 500 experienced in a relatively short period served to precipitate a wholesale exit by Mr & Mrs Main St of the market. When they saw their funds halved, they were scared to death and so just sold material amounts of their mutual fund holdings to put the remaining funds into bank accounts in a desperate attempt to save what was left, if anything. Of course, the timing was atrocious.

The market hit a bottom in March 2009 with the S&P’s low, ominously, being 666 and from which point it started a new major uptrend. The S&P 500 has actually risen 132% and has, at this point completely recovered the losses from the financial crisis.

Households pulled out of the market late. In early 2009 with fears over new President Barack Obama’s policies, confidence hit rock bottom in unison with valuations – precisely the point they should have been buying and akin to what is happening in the mining sector at the moment and as we have reasoned extensively here in recent weeks. The FED throwing gigantic amounts of liquidity at the market, and with a strong commitment to bring unemployment down to 6.5% in unison with the recent upbeat momentum in non-farm payrolls data is creating new found late stage confidence in the market. With the recovery experienced in house prices; households feel they’re losing huge gains by just being on the sidelines. Holding cash in their bank accounts earning less than 1% per year at most means they are losing in real terms and seemingly every week the market rises a couple of percent. The cost of being out of the market is not just financial but emotional now.

The FED wants people to return to risky assets and is willing to throw trillions of dollars in the pursuit of that goal (we have a new report about the FED’s bubble blowing about to be released so keep an eye on our Trading Guides page). It is finally succeeding in seducing households back into the stock market but unfortunately, it may be too late for them. If you look at the following chart, you understand why it may be too late to enter the market now

With the S&P 500 having fully recovered from the financial crisis and after a bullish run of 1,485 days which inflated the index by 132%, the risk of it now being near a peak is high. With a FED-inflated financial marketplace instead of an economic-driven one, we are also risking forming a bubble, one that when it does burst will, in our opinion, be similar to the tech bubble of the 2000s that gave rise to what is now known as the lost decade. Take a look at our Bull Market end guide below in which we postulate on a potential end date and analyse historic bull markets for duration and strength.