{"id":61231,"date":"2023-09-15T04:14:01","date_gmt":"2023-09-15T08:14:01","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/average-investor-allocation-to-equities-chart-and-implications-for-markets\/"},"modified":"2023-09-15T04:14:09","modified_gmt":"2023-09-15T08:14:09","slug":"average-investor-allocation-to-equities-chart-and-implications-for-markets","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=61231","title":{"rendered":"Average Investor Allocation To Equities Chart And Implications For Markets"},"content":{"rendered":"
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In June, I published an article titled “What is The ‘Average Investor Allocation to Equities’ Telling Us?” What follows is a quarterly update to that piece.<\/p>\n

In the article, I reference my favorite chart, the “Average Investor Allocation to Equities”. Since June, the “Average Investor Allocation to Equities” has increased in value, thus suggesting that the projected 10-year forward annualized price return for the S&P 500 has decreased modestly. The data for the chart comes from the Federal Reserve Bank of St. Louis and is updated quarterly.<\/span><\/p>\n

I’ll start with the chart and then get into the analysis.<\/p>\n

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\"Chart1\"<\/span>
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Author Created<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

I find it is usually helpful to start with a definition and I’ll use the one I have provided in the past:<\/p>\n

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“The blue line in the chart shows the “Average Investor Allocation to Equities”. As the name would imply, this line shows how much (i.e., what percentage) of the average investor’s portfolio is allocated to equities at any given time as opposed to other asset classes (i.e., fixed income, commodities, cash, etc.) This line maps to the left-hand scale of the chart.<\/span><\/em><\/p>\n

The yellow line in the chart shows the “10-Year Forward Annualized Price Return” of the S&P 500 Index. This is telling us what the 10-year forward return was for the S&P 500 Index from the corresponding point on the blue line. This line maps to the right-hand scale of the chart and the values have been inverted to better show the relationship between the two metrics.”<\/em><\/p>\n<\/blockquote>\n

Next, we want to understand how to interpret this chart:<\/p>\n

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“<\/em><\/strong>Very simply, the higher the blue line (i.e., the “Average Investor Allocation to Equities”), the lower the subsequent 10-year return for the S&P 500 Index and vice versa.<\/em><\/p>\n

Given the tightness of fit for these two lines (note the correlation figure in the top left-hand corner of the chart), I have created a model to project forward returns for the S&P 500 Index (see chart below).”<\/em><\/p>\n<\/blockquote>\n

The current “Average Investor Allocation to Equities” figure is 47.40% as of June 30, 2023 (our most recent update). This corresponds to a projected annualized return of -0.73% over the next 10 years for the S&P 500 Index.<\/p>\n

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\"Chart2\"<\/span>
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Author Created<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

It is important to remind readers that this does not mean that we should expect a return of approximately -0.73% every year for the next 10 years. Instead, what it means is that over the next decade, we will likely see a market that has very dramatic sell-offs followed by very dramatic rallies which will net out to effectively a return of -0.73% over the next 10 years.<\/p>\n

Taking it a step further<\/strong><\/h3>\n

The following chart is the same chart as the first one above but I’ve broken it down into three different segments. The first two segments represent a full cycle (i.e., trough-peak-trough) for the Average Investor’s Allocation to Equities. The third segment is the current cycle which has yet to complete.<\/p>\n

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\"Chart3\"<\/span>
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Author Created<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Note in the chart above that I have used green\/red arrows to denote up\/down trends for the Average Investor’s Allocation to Equities and subsequently the returns that followed those periods. Here is what those same periods look like when we chart the S&P 500. Note: the grey vertical bars represent US recessions.<\/p>\n

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\"Chart4\"<\/span>
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TradingView<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The immediate takeaway is that during the “green arrow” periods, you can pretty much close your eyes, go long the S&P 500, and you will fare quite well.<\/p>\n

Alternatively, the “red arrow” periods are a bit more challenging and typically end with a sideways or negative return. With that said, note that during the “red arrow” periods, it is not uncommon to have “very dramatic sell-offs followed by very dramatic rallies” as I noted above.<\/p>\n

Where are we now?<\/strong><\/h3>\n

We are in the “red arrow” period; therefore, as noted above, over the next 10 years, we should expect a return of approximately -0.73% on an annualized basis. Coupled with that will likely be a recession or two and some dramatic selloffs associated with those recessions, but some equally dramatic rallies on the backside of those recessionary periods.<\/p>\n

The million-dollar question is: “When are we going to have a recession and one of the selloffs you mentioned?” The honest answer is that I don’t know but then again, neither does anyone else. The best we can do is to make an educated guess based on historical relationships and plan accordingly while at the same time realizing that you never want to have all of your eggs in one basket assuming only one outcome is the only possibility.<\/p>\n

To that end, I would encourage you to read the piece I wrote last week which talks about the clues that the recent rise in the Unemployment Rate may provide as it pertains to when to expect the next recession. You can find it here.<\/p>\n

“Red Arrow” Periods<\/strong><\/h3>\n

The two “red arrow” periods noted above occurred during the following time frames:<\/p>\n