TINA and its underlying risk for stock markets

January 29, 2024No Comments

Today, I’ll address the demographics of the stock market, focusing on investors 55+ of age. We’ll take a quick look at their proportional ownership of the overall markets, and why that may matter.

 

“Never, ever invest in the present. It doesn’t matter what a company is earning, what they have earned. You must visualize the situation 18 months from now, and whatever that is, that’s where the price will be, not where it is today.” — Stan Druckenmiller

U.S. equity markets are breaking new highs, but those breakouts may be treading on somewhat thin air. Don’t get me wrong, a breakout should not be argued with in the near term. However, underlying factors, as discussed in past blogs, are suggesting at least an awareness of current risks. For example, I’ve noted breadth (we are in a one-trick pony market focused on tech).  I’ve also ongoing mediocre risk/ return tradeoffs in recent Bear-o-meter readings. Click those links to see the charts and commentary.

Some sentiment indicators are also entering their bearish zones. This is the CNN Fear & Greed indicator:

 

Against that backdrop, it’s surprising to see who holds those surging, somewhat overbought, equities.

TINA rules the older generation

With interest rates so low, TINA (There Is No alternative to stocks) has been the prevailing attitude by investors since 2000. What’s surprising is that its not just been younger growth-orientated investors overloading on stocks. This, even with the recent spike to more attractive yields on safer securities. People the age of 55 + hold 80% of their entire portfolio of securities in equities! That’s up from an average below 60% in the nineties – see chart below, courtesy of Rosenberg Research. The share of the market held by people over 70 years old is up to an astonishing 30%!!

Why this matters:

As people reach retirement age, risk aversion should be falling.  Historically, after one retired, risky assets were converted into safe higher yield securities with predictable cash flows. That’s because retirees don’t have the luxury to buy and hold through a market downturn. Strong markets have kept these normally risk investors in equities.

If a downturn does materialize, selling by this massive portion of the market could exacerbate the spiral. 

Chicken and egg

If equities enter a true, longer lasting bear market as seen so many times in history – or a prolonged sideways market, many retirement-aged equity owners will be forced to quickly rebalance their portfolios in favor of fixed income and cash. This will reinforce the bearish momentum and weighing further on prices. Selling begets selling.

I do keep this in mind as an investor. Its not something to act on right away. But it should be taken to heart – especially if one thinks that a buy and hold approach is the best strategy in these times. When the demographic snowball begins to roll, we don’t want to stand in its way.

 

 

 

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