February 11, 1998, New York Times
Share of Household Wealth in Stocks Is at 50-Year High
GraphicsSlicing the Pie Investments in American Households 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.
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