Narrow Participation: another reason we have not seen the end of this bull market

Last week we highlighted the fact that, despite having a flawed President in the White House, the fundamentals of the economy continue to be sound (at least for now). In the past, we have opined that the economy and the stock market, while connected, are not the same thing. The market is affected by, and suffers from, a complication of factors, but we are of the view that the most relevant and consistent factor affecting markets is investor sentiment, which is why we always analyze several different metrics that are proxies for investor sentiment.

At its core, the stock market is an open auction where demand and supply are the driving forces. Demand tends to push up price, and supply tends to do the opposite, and both are self-reinforcing; increasing prices tend to inspire confidence, thereby increasing demand, and declining prices tend to create fear which leads to panic and increased selling (supply). Historically, when confidence and prices become elevated, we tend to see a majority of participants holding bullish sentiment. Once the majority have become bullish, it means that most of those who were likely to buy stocks have, in fact, already bought them. In other words, if everyone has bought, then all that is left is sellers. That is where the old market adage, ‘the market climbs a wall of worry,’ comes from; as long as enough participants are worried (not panicked), there will be future buyers.

At the moment, sentiment is not very bullish, so we continue to hold the view that we are in a normal correction, not the start of a new bear market. We do not think that everyone who is likely to own stocks has already bought them. Up until now, this bull market has been created by the special interests (the financial industry and company stock buy-backs). The participation in the stock market has not been wide spread.

The table below, lists the results of a Gallup poll of household stock ownership. It shows that the percentage of households with some investment in the stock market, has dropped during the present bull market; going from 61% of households invested in stocks in 2009, down to 54% in 2017. Compare this to the 64% at the top of the tech rally in 2000, and the 65% at the top of the housing bubble in 2007.

As employment earnings start to increase, the smaller households will increase their participation in the bull market and become the future buyers that take us to the next top.

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