Mom-and-pop indicator implies headroom for stocks

May 8, 2013

NEW YORK (Reuters) – This is not your parents’ bull market.

In fact, your dad and mom very may well have abandoned the market entirely. That could be the single best indicator that stocks have room to run.

The Dow Jones industrial average closed above 15,000 for the first time on Tuesday, the same day the S&P 500 made its all-time high for the fourth consecutive trading session.

You can argue all you like about how corporate profits are vulnerable and the market is hung from the clouds on slender threads spun by Ben Bernanke, but what you can’t say is that we are in classic broad-based stock market mania.

Two facts:

1 – Only 52 percent of Americans own stocks, according to polling from Gallup published on Wednesday. That’s the lowest since they started asking the question in 1998.

2 – Only 31 percent of small investors describe themselves as bullish, well below historical norms, and nearly 36 percent are bears, well above historic averages, according to an American Association of Individual Investors survey released on May 2.

The demographics underpinning these facts may argue for caution, but they do not suggest that we are poised for a correction (absent, of course, some external shock). Instead, these studies suggest there are still some people out there who might, if things stay calm and stocks keep going up, have the money to give the market more gas.

Yes, the stock market rally is in large part the creation of extraordinary central bank policy, and yes, that is a narrow ledge upon which to build a solid foundation.

And indeed, mom and dad may well not own stocks because they are a good bit less well off than they were five or 10 years ago, which in itself does not argue for a sustainably vibrant economy.

Still, if you subscribe to the “manias and crashes” school of financial markets, the single best indicator of an end-stage bubble is that everyone is doing it and, even worse, won’t shut up about it.

We are not there. You probably don’t have a shoe-shine boy, but if you do he definitely isn’t trying to talk you into shale oil plays. Neither is your dentist, though he might well be clubbing together with friends to buy rental properties. And if you tell your cab driver you do something having to do with finance, he is more likely to complain about the iniquities of the investment system than crow about how it is making him rich.

All of this should give those of us with bearish, or as I prefer, skeptical, tendencies, some comfort.


The AAII survey of small investors has been running since 1987, taking in several of the booms and busts of modern Greenspan-style central banking. The survey is simple and asks investors to describe themselves as bullish, neutral or bearish. One of the most striking things about the data is how often extremes line up with market tops and bottoms.

The highest-ever bullish figure was 75 percent, near the peak of the dot com bubble, while the lowest-ever such figure was 6 percent in 1990, when Iraq controlled Kuwait and the first Gulf War was in preparation. Similarly, bearish sentiment hit its all time low at 6 percent in the summer before the crash of 1987.

In the same vein, the Gallup poll showed an all-time high of stock market participation at 65 percent in 2007, and it has been falling ever since, even as the unemployment rate partly recovered.

Now, it may be that small investors have learned the lessons of the bubblicious last three decades and have simply decided to sit this one out, but that is an argument that rests on the hope that human nature has changed. My guess would be that as people get their 401(k), brokerage and mutual fund reports in coming months, they will like what they see and it will fill many with a painful mix of greed and regret. That kind of thing is the true building block of a mania, and that we have yet to see.

So whose money has been driving the rally? Partly it is professional money managers, whose performance is benchmarked against the market and who will thus have been conditioned by the strong recovery in stocks since the crash to be in the market or to look bad. It also has partly been driven by institutions like pension funds and endowments taking on risks, reinvesting the money handed to them by central bank bond buying in something with more yield and upside.

The one common denominator is that all of these professionals know that authorities have effectively underwritten the market.

So yes, you can say this is a cynical rally. Cynical yes, but not crazy, at least not yet. That stage may well come, but it could be when stocks are quite a bit higher than now.

(James Saft is a Reuters columnist. The opinions expressed are his own.)

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at

(Editing by Chelsea Emery and Dan Grebler)

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