A stock market index with one of the best track records rarely has good news for investors

It is optimistic for the stock market that the average household stock allocation has fallen as much as it has.

I’m referring to an indicator that its creator, the anonymous author of the Philosophical Economics blog, has called “the single greatest predictor of future stock market returns.”

The average household portfolio allocation to stocks is a contrasting indicator, as higher allocations are associated with lower stock market returns and vice versa.

According to the econometric tests it subjected to this and other evaluation indices, it has one of the best, if not the best, track records when predicting the stock market’s true total return over the next decade.

There are other conflicting signs that have the same outcome. Institutional investors over the past 12 months have poured far more money into US equity funds than retail investors have taken in. It is rare for the stock market to fall for two consecutive years, which indicates that 2023 could be a pivotal year for the S&P 500 SPX,
+0.59%
After this year’s bear market.

Average household equity allocation reached an all-time high, and thus the most bearish position, at 51.73% in March 2000, the month of the peak of the dotcom bubble. We all remember what happened next.

This indicator was almost as high as one year ago, in December 2021, at 51.66%. Since the date of that reading, the Vanguard Total Stock Market ETF VTI,
+0.55%
– of which 4,026 shares represent the US market as a whole – lost 19.9% โ€‹โ€‹of their value.

The index is updated every three months, even after a lag of several weeks. Two weeks ago the Fed released the third quarter data which are inputs for the index, the latest value of which is 43.62%. While this latest reading is still above the historical average, it no longer indicates a true negative total return for the S&P 500 over the next decade. Instead, you expect the stock market to beat inflation at an average rate of 0.6% annually.

Beating inflation by less than a percentage point may not hit you with anything to write about. But this is the first time since the beginning of the pandemic that the index expects a positive return.

Moreover, I wouldn’t be surprised if over the next decade the stock market beat this expected return. This is due to the special circumstances that caused the index to drop a lot over the past year. During a typical bear market, the average household portfolio’s allocation to stocks will automatically decline in one form or another as stocks lose ground and bonds rise in value. When that happens, investors need not actually sell any of their shares for the average allocation to fall.

In contrast, in the current bear market, bonds have performed as badly as stocks, if not worse. As a result, the decline in the average household share allocation last year was caused in large part by the actual sales of shares. From a contrarian point of view, these sales have much more upside significance than the decline in equity allocations that results when stocks fall and bonds rise.

How to accumulate eight rubrics

The table below lists the eight evaluation indicators that I highlight in this space each month. I’m not aware of anyone else with a superior historical record. As with the average household share allocation, many other indicators in the table also fell below the limits of overvaluation at the end of 2021.

latest

A month ago

the beginning of the year

Percentage since 2000 (most declining percentage)

percentage since 1970 (100th most for touchdowns)

Percentage since 1950 (most declining percentage)

Price-to-earning ratio

20.43

21.81

24.23

40%

62%

71%

CAPE ratio

27.97

29.86

38.66

69%

79%

85%

price-to-earnings ratio

1.74%

1.68%

1.30%

73%

82%

87%

P / sales system

2.30

2.45

3.15

89%

89%

89%

Price-to-book ratio

3.82

4.07

4.85

90%

86%

86%

Q system

1.63

1.73

2.10

80%

89%

92%

Buffett’s ratio (market cap/GDP)

1.51

1.61

2.03

88%

95%

95%

Average household share allocation

43.6%

43.6%

51.7%

75%

84%

88%

Mark Hulbert is a regular MarketWatch contributor. Its Hulbert rating tracks investment news releases that you pay a flat fee to review. He can be reached at mark@hulbertratings.com.

#stock #market #index #track #records #rarely #good #news #investors

Leave a Reply

Your email address will not be published. Required fields are marked *