...we can't and we won't want to see this when we're in the midst of a Melt-up.
...I know that when stocks go up, our dopamine level goes higher, it feels good and we want to be part of it, not being out of it.
...except that things can unravel very quickly, learn to sell into strength and know key dates.
Condensed version of review by Jim Colquitt.
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Weekly Chart ReviewQuarterly Update: Average Investor Allocation to Equities
[/table] [/table]I have been blessed with three wonderful children and a lovely wife. All four are keenly aware of this newsletter and the time I spend putting it together each week.I wish I could tell you that all four of them read the newsletter from start to finish each week and that it leads to in-depth macroeconomic discussions around the dinner table but that would be a bit of a stretch.That said, my 15-year-old daughter gave me some “feedback” recently. She made the following statement:“No one wants to read this many words Dad. You need more pictures (think charts) and less words. You do that and I bet your readers would double.”Candidly, I think she’s on to something. I do use a lot of words, but it is always done with the intention of making sure that I am thorough in my explanation of what I’m trying to convey but maybe that isn’t needed.Henceforth, “more ‘pictures’, less words”!Overview
Quarterly Update: Average Investors Allocation to Equities
S&P 500 & NASDAQ Targets
Asset Class Review
Quarterly Update: Average Investors Allocation to Equities
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The current quarterly value for the “Average Investors Allocation to Equities” chart above is 50.3%.This value has only been exceeded 5 other times in almost 75 years’ worth of quarterly data points.Those periods and values were as follows:
4Q 1999 = 50.6%
1Q 2000 = 51.5%
2Q 2000 = 50.4%
2Q 2021 = 50.4%
4Q 2021 = 51.3%
Why does this matter?“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.”Here’s what this looks like on a scatterplot:
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The “You are here!” value is typically not the starting point for extended bull markets.Instead, the linear regression scatterplot suggests that from this starting point, we should expect a -2.19% annualized return over the next 10 years for the S&P 500.Here’s how the S&P 500 fared over the subsequent 10 years vs. the highlighted starting points noted above:
4Q 1999 = 50.6% —> -2.72%
1Q 2000 = 51.5% —> -2.45%
2Q 2000 = 50.4% —> -3.39%
2Q 2021 = 50.4% —> N/A
4Q 2021 = 51.3% —> N/A
Here’s what it looked like on a chart:
Yellow highlighted box = 4Q 1999 - 2Q 2000
Vertical red shaded boxes = recessions
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The takeaway is that the last time we reached these levels, we had two recessions over the subsequent 10-year period and drawdowns of -50.50% and -57.69%.Does that mean that has to happen this time, no, but as I stated above, I don’t believe this is the place where extended bull markets begin.S&P 500 & NASDAQ TargetsHere’s the conundrum. The market is extremely bullish right now.Scroll down to our Asset Class Review and you will see a lot of “Max Bullish” readings across the various equities we cover.Going back to the previous chart, I have changed the time frame from quarterly to weekly and posted it below.It’s not inconceivable to think that we’re currently living in a period that is similar to the “melt-up” that we saw in late 1999, early 2000 (blue arrows).
, the lower the subsequent 10-year return for the S&P 500 Index and vice versa.”Here’s what this looks like on a scatterplot:
