February 11, 1998
Share of Household Wealth in Stocks Is at
50-Year High
By EDWARD WYATT
After three years of rapidly rising stock prices, American households
have more of their fortunes invested in the stock market than at any
time in the last 50 years -- and perhaps ever.
Even that most prized possession, the home, has taken a back seat to
stocks for the first time in three decades.
An analysis by The New York Times of data compiled by the Federal
Reserve shows that stock investments made up 28 percent of American
household wealth -- a measure that includes houses, cars and other
tangible assets as well as financial assets -- at the end of September, the
most recent period for which data are available. And stocks accounted
for 43 percent of financial assets, which include bank accounts, mutual
funds and securities. Those numbers have more than doubled since 1990.
The implications of this profound growth in stock exposure are many. The
size of their paychecks aside, many Americans are feeling richer as the
value of their stock holdings rises.
But with so much in stocks, a sharp market decline could seriously erode
the financial well-being of Americans, even if their money is largely tied up
in long-term retirement plans. In years past, the biggest asset of most
Americans was the home, making the real estate market far more
important than the stock market in personal finance. Where skyrocketing
home prices once provided reassurance to the middle class, soaring stock
portfolios now do. And stock prices are subject to much wider
short-term swings than home values.
The extra wealth from stock portfolios has also encouraged Americans to
spend more and save less. The Commerce Department reported last
week that the rate of saving fell last year to 3.8 percent of disposable
income, the lowest level in 58 years. The saving rate has been dwindling
since this bull market began in 1982 and is now less than half its postwar
peak of 9.5 percent, set in 1974.
What Americans do set aside for saving, they increasingly allocate to
stocks, rather than to more conservative investments. That heightened
interest accounts for about a third of the increase in stocks' share of
wealth, with the other two-thirds coming from the rise in share prices.
And the timing has been good of late. Stocks have been gaining 30
percent annually the last three years. "It's been jammed down their throats
that they have to put their money in equities if they want anything left for
retirement," said Melissa R. Brown, a stock market analyst at Prudential
Securities.
Still, the situation could be fundamentally altered if stocks return to their
historical gains of about 8 percent a year.
Concerns about how investors with bulging equity portfolios will react to a
steep or prolonged downturn in stock prices have plagued Wall Street for
several years. To allay fears of a panic, Wall Street analysts have often
said that individual stock exposure is no greater than it was 30 years ago
-- though that estimate does not take into account many investment
products that are gaining in popularity.
The extraordinary bull market has given few clues about what individuals
will really do. For example, the brief but sharp decline last October
became a buying opportunity for many.
The last time Americans had their faith in stocks truly tested was the stock
market crash of 1987. Then, stocks accounted for only 13 percent of
household assets -- half as much as today -- and Americans had more
money in their savings and checking accounts than in stocks.
"Individuals certainly are taking more risk today than they were taking five
years ago," said Scott L. Lummer, chief investment officer of 401(k)
Forum Inc., which sells investment advice online. "A lot of that is for good
reasons.
"But there is a growing set of the populace that looks at the last three
years of returns and says, 'The market goes up 30 percent a year.' I'm not
sure those people really understand the risks involved in stocks, and
because of that they may have a lot more money in equities than they
should."
How much is enough depends on who is talking. Wall Street professionals
usually put the ideal portion of stocks at about 60 percent of one's
financial assets. Some individuals go much further.
Don Matsanoff, a 36-year-old commercial real estate agent in Columbus,
Ohio, believes he did not have enough money invested in stocks at the
beginning of the 1990s. Less than half of his financial assets were in
equities. By the end of last year, Matsanoff had raised that portion to
more than 80 percent. To him, that is still not enough.
"With the returns I've seen in the market over the past few years, I'm
putting a considerable percentage of the income I'm making at work back
into the market," he said. "I'm confident that it will continue to grow."
With mutual fund managers commanding sports-star salaries and
investment shows jamming the airwaves, the man on the street may accept
the news about rapid growth in stock ownership without flinching. But it
goes against the conventional wisdom on Wall Street.
In quarterly reports over the last two years, Abby Joseph Cohen, the
stock market strategist at Goldman, Sachs and one of the leading bulls on
Wall Street, has noted that Americans have been increasing their stock
investments in recent years as inflation has waned and as baby boomers
save more for retirement. But, she says, the percentage of their financial
assets in stocks "remains well below the levels of the late 1960s."
While Wall Street has reached such conclusions by focusing on holdings
of individual stocks and stocks through mutual funds, other categories of
stock ownership have grown steeply. At the end of 1996,
employee-controlled plans accounted for half of the $3 trillion in
corporate pension plans, according to the Federal Reserve, up from a
quarter of the total when the 1980s began.
In those plans, the employee, rather than a professional pension fund
manager, decides how to invest -- in stocks, bonds or other assets. The
same is true for variable annuities, which essentially combine the tax
deferral of an insurance policy with a mutual fund, and other types of
variable life insurance products, with returns based on market
performance. Sales of variable insurance products have skyrocketed in
recent years.
Even the Fed's key person on the issue says that these investment
products should be included in any study of household assets. "That's
what we do when we look at the data," said Albert M. Teplin, chief of the
Federal Reserve section that collects and publishes the numbers. "I'm not
sure why Wall Street does not seem to do that."
Teplin concludes that the portion of total household assets in stocks is
much bigger than it was in the 1960s.
The Wall Street analysts who monitor the Fed data say they have not
tried to add up all the indirect and direct stock holdings of households
because the data are notoriously soft. "Even if the data were clear," Ms.
Cohen of Goldman, Sachs said, "I think that we still would come up with
the same conclusion," that current stock holdings do not surpass those in
the late 1960s.
The analysis by The Times shows that when all indirect stock holdings are
included, stocks account for 43 percent of household financial assets, up
from 39 percent in 1968, and 28 percent of total household assets, up
from 26 percent in 1968.
The numbers are higher than at any time since the end of World War II.
But because the Fed data extend only to 1945, comparisons with earlier
periods are difficult.
The shift has, nonetheless, been clear over the last 50 years. Americans
emerged from World War II with only 27 percent of their assets in real
estate, durable goods and other tangible assets. As they added homes,
cars, refrigerators and other goods in the postwar boom, those assets
soared to 37 percent of the total in 1955.
Tangible goods soared again in the 1970s, exceeding 45 percent of
household assets by the end of the decade. Those increases came as the
value of most financial assets fell victim to runaway inflation and rising
interest rates. By last year, tangible assets had fallen back to 35 percent
of total household assets.
Similarly, the portion invested in stocks rose from 15 percent at the end of
World War II to nearly 26 percent in 1968.
The late 1960s "was a very similar environment to what we see today,"
said Ms. Brown, the Prudential analyst. "It was another period of very
low inflation, stable-to-declining interest rates and decent corporate
profits. We had a good market, the economy was in good shape and
unemployment was low."
In short, there was no place other than stocks to put your money if you
wanted to earn any return at all, said H. Bradlee Perry, former chairman
of and now a consultant to David L. Babson & Co., the Cambridge,
Mass., manager of the Babson mutual funds. "There were no bond mutual
funds at the time, and the money market fund was just coming onto the
scene," Perry said.
Few people who were around on Wall Street in 1968 need to be
reminded what lay ahead. The market lost nearly one-third of its value
over the next 18 months, and by the end of 1970, stocks had fallen to 20
percent of household assets from 26 percent two years earlier. As it
turned out, stocks were just warming up for a lengthy bear market.
In those plans, the employee, rather than a professional pension fund
manager, decides how to invest -- in stocks, bonds or other assets. The
same is true for variable annuities, which essentially combine the tax
deferral of an insurance policy with a mutual fund, and other types of
variable life insurance products, with returns based on market
performance. Sales of variable insurance products have skyrocketed in
recent years.
Even the Fed's key person on the issue says that these investment
products should be included in any study of household assets. "That's
what we do when we look at the data," said Albert M. Teplin, chief of the
Federal Reserve section that collects and publishes the numbers. "I'm not
sure why Wall Street does not seem to do that."
Teplin concludes that the portion of total household assets in stocks is
much bigger than it was in the 1960s.
The Wall Street analysts who monitor the Fed data say they have not
tried to add up all the indirect and direct stock holdings of households
because the data are notoriously soft. "Even if the data were clear," Ms.
Cohen of Goldman, Sachs said, "I think that we still would come up with
the same conclusion," that current stock holdings do not surpass those in
the late 1960s.
The analysis by The Times shows that when all indirect stock holdings are
included, stocks account for 43 percent of household financial assets, up
from 39 percent in 1968, and 28 percent of total household assets, up
from 26 percent in 1968.
The numbers are higher than at any time since the end of World War II.
But because the Fed data extend only to 1945, comparisons with earlier
periods are difficult.
The shift has, nonetheless, been clear over the last 50 years. Americans
emerged from World War II with only 27 percent of their assets in real
estate, durable goods and other tangible assets. As they added homes,
cars, refrigerators and other goods in the postwar boom, those assets
soared to 37 percent of the total in 1955.
Tangible goods soared again in the 1970s, exceeding 45 percent of
household assets by the end of the decade. Those increases came as the
value of most financial assets fell victim to runaway inflation and rising
interest rates. By last year, tangible assets had fallen back to 35 percent
of total household assets.
Similarly, the portion invested in stocks rose from 15 percent at the end of
World War II to nearly 26 percent in 1968.
The late 1960s "was a very similar environment to what we see today,"
said Ms. Brown, the Prudential analyst. "It was another period of very
low inflation, stable-to-declining interest rates and decent corporate
profits. We had a good market, the economy was in good shape and
unemployment was low."
In short, there was no place other than stocks to put your money if you
wanted to earn any return at all, said H. Bradlee Perry, former chairman
of and now a consultant to David L. Babson & Co., the Cambridge,
Mass., manager of the Babson mutual funds. "There were no bond mutual
funds at the time, and the money market fund was just coming onto the
scene," Perry said.
Few people who were around on Wall Street in 1968 need to be
reminded what lay ahead. The market lost nearly one-third of its value
over the next 18 months, and by the end of 1970, stocks had fallen to 20
percent of household assets from 26 percent two years earlier. As it
turned out, stocks were just warming up for a lengthy bear market. |
