Travis N. from Maui, HI asks: Hi Mitch, I read an article recently about investors being “giddy” about year-to-date gains in the stock market, which led to people adding more to their stock holdings in retirement accounts. Do you think this type of optimism may be bad for markets? If investors get too comfortable that tends to be a bad sign, right?
Mitch’s Response:
Thank you for sending in your questions. I’m familiar with the article you’re referencing, which cited some data about equity fund inflows and investors’ overall bullish outlook. I’ll first share some of the data points from the article with other readers before I address your question about the role sentiment plays in market returns.
Many equity investors are indeed feeling positive about year-to-date returns, which have been well into the double-digits for large-cap stocks. The S&P 500, for instance, has reached over three dozen all-time highs in 2024, and that has translated to higher balances in retirement and other investment accounts for equity-focused investors.1
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According to Q2 2024 data from Fidelity Investments, there were nearly half a million 401(k) retirement accounts with balances of at least $1 million, which is over 30% more than last year. JPMorgan has noted that U.S. households now have approximately 40% of total financial assets allocated to stocks, which is the highest percentage on record going back to 1952.
In fairness, this data may tell us more about the overall strength of the stock market over the past year than it tells us about investor sentiment. Since the stock market has gone up a lot, it makes sense that balances are higher and allocations to stocks are also higher. Some investors may simply be allowing equity allocations to drift higher as the market rises, versus rebalancing regularly.
The article also cites fund flows and a bullish sentiment measure from the American Association of Individual Investors (AAII). According to a September 4th survey, the AAII found that 45.3% of respondents felt bullish about the next six months, compared to 24.9% who had a bearish outlook. Equity funds have also seen inflows for eight consecutive weeks (through late August), with a notable surge for small-cap funds, which drew $12.7 billion of inflows in July – a new monthly record.
Taken together, all these data and findings paint a picture of optimism amongst investors, which I agree is worth keeping an eye on. What we generally want to look for, however, is euphoria and complacency with a backdrop of deteriorating fundamentals, which is not what I’m seeing in the current environment.
I believe that the early August and early September volatility have kept many investors in cautious mode, and a softening jobs market and weak manufacturing data – neither of which I think raises alarm bells – has been portrayed as evidence that the economy is on shaky ground. Meanwhile, investors largely ignored strong services activity in August, which is a much more important indicator of overall economic strength. This demonstrates that there is still a ‘wall of worry’ bias, even as some investors have embraced stocks more in an up year.
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