We've been making a lot about the fabulous stock market rally. It is fabulous, but now investors crowing over the fabulous market are starting to wonder if something almost unthinkable could happen in 2017: the return of the average investor.
Everyone knows we lost a vast swath of the investing public after the 2008 financial crisis, and for the most part they have not come back, even as the stock market has come back.
How bad is it?
A Gallup poll conducted in April of this year stated that 52 percent of Americans say they invest in stocks, matching a record low, after hitting a record high of 65 percent in 2007.
It's much worse than this. Stock ownership is increasingly concentrated in the hands of the wealthy. New York University economist Edward Wolff estimated that in 2013 about 90 percent of all stocks were owned by the wealthiest 10 percent of households.
This is the great tragedy: The S&P 500 is up over 200 percent since bottoming in 2009, but stock ownership has become concentrated in fewer and fewer hands.
Confidence in owning stocks is also poor compared to other investments. A Gallup poll of American households in April of this year indicated that only 22 percent of Americans believe that owning stocks are the best long-term investment, a figure that has been declining for several years:
A full 35 percent of Americans think real estate is the best investment for the long run, while 17 percent say gold and 15 percent think it is savings accounts. Another 7 percent think the best investment is bonds, according to the poll.
Look at those numbers! Nearly as many Americans in April thought gold was the best long-term investment as think stocks are. And one in seven still think savings accounts are the best long term investments!
The 2008 financial crisis was a defining moment for investments. Americans shifted from higher risk to lower-risk investments like savings accounts. What's remarkable is that nearly 10 years after the financial crisis, and even after one of the great bull markets of all time, Americans still have not notably changed their diminished view of the stock market.
What would it take to get more households to own stock?
I say that because we know that the old answer--new highs dragging in investors--doesn't work any more. Every rally we have had in the last several years--every new high--has been met with open hostility and derision. People just doesn't believe it, and aren't buying it. Some don't trust the markets. Some think it's phony or rigged. Some are just afraid of losing money. We have joked for years that the public mistrust of the market is the best friend the rally has had, because it's kept so many people away.
So, could this rally be different? There's a couple reasons for optimism:
1) The most recent leg of this rally — the Trump rally — has been accompanied by the one element the other rallies have lacked: investor enthusiasm. Investor sentiment gauges have shot up. Consumer confidence is at a 9 year high.
CNBC's All-America Economic Survey, released this morning, has indicated that 40 percent of respondents now say this is a good time to invest, up 10 points from before the election. While real estate is again the top choice for best investment right now, stocks gained the most ground at the expense of gold, real estate and treasuries. That is encouraging.
2) We are starting to see real revenue growth. Professional stock watchers tend to be dismissive of polls and sentiment indicators. But they do pay attention when earnings start to turn positive — as they have in the third quarter, after four quarters of declines. And they especially pay attention when revenues begin to turn positive, as it did in the third quarter.
But the gain — 2.6 percent after six quarters of declines — is still small. The underlying premise of the "Trump rally" has been that the economic expansion will translate into a major turn in revenue growth. There will be less reliance on "manufactured earnings", that is, earnings that are propped up by little more than cost cutting.
"The average investor should feel better about the markets, and that will be even more evident when you see a genuine improvement in earnings," Kenny Polcari of O'Neil Securities told me. He noted that if we got real revenue growth it would it go a long way toward convincing average investors that the stock market is not phony or rigged.
Wouldn't it be something if the largest source of demand for stocks in 2017 weren't corporations buying back stock, but individuals trying to catch up on a decade of indifference and hostility?
Hey, a guy can dream, no?