All Time High Household Equity Allocation

There is a reason for the underlying bid in this market.  Investors are piling money in at a rate of over $1 trillion annualized into equity funds in 2021.  Compare this to the previous 20 years.  Post 2008, the only years that are over $250 billion are 2013 and 2017.  It just so happens that those were 2 years when bonds were heavily sold and out of favor, just like this year.   2021 is 2017 on steroids and HGH.

Also adding fuel to the runup is the post earnings season buyback window coming in, with stock buybacks providing even more buying power.   Equity fund inflows + corporate stock buybacks + $120B/month in QE.  Also don't forget retail accounts that are now massively invested in individual stocks, more than any time since 2000.  Those are the liquidity forces that bears are battling here.  It is a powerful force in this market, but it will not last forever.  

Counter-acting those forces are IPOs, SPACs, secondary offerings, corporate stock option issuance, which are all substantial, but not on the same scale as the flood of money coming into the market.   

With further Covid stimulus unlikely and the infrastructure package being spread out over several years, the government will have a much smaller footprint on the market over the next 3 years (assuming Republicans win either House or Senate, which is high probability just looking at history of midterms), it will come down to animal spirits and investor psychology and willingness to go even heavier into equities, which are already at all time highs, even higher than 2000 bubble highs.  Below is as of June 2021, so the household equities percentage of total assets is even higher today.

Combine this with record high valuations and the TINA (there is no alternative) sentiment about stocks vs. everything else, it is a long term warning sign. 

The bears have been crushed since March 2020, and most of the time from 2009 to 2021.  Trees don't grow to the sky.  There is long term confidence and  blind optimism towards stocks, passive investing and putting money into S&P index funds as a result of a 12 year bull market.  This is reflected in household equity allocations and this year's massive equity fund inflows.  With a Fed asleep at the wheel and Powell recklessly staying dovish as he seeks Biden's approval and reappointment, I still see several more months left in this SPX up cycle, but all the flashing amber lights are there.  

1999-2000 was a Nasdaq bubble that took the SPX along for the ride.  This time, its a SPX bubble that is taking bitcoin, art, alternative assets, etc. along for the ride.   The breadth and magnitude of this bubble is the biggest in the history of mankind.  And unlike previous bubbles when governments were either on a gold standard or didn't embrace simultaneous bazooka QE and fiscal stimulus, this time, the bailout mentality is off the charts.  

In all likelihood, the bubble will pop in 2022, and the Fed, with their plans on hiking in 2023 will be stuck on zero.  There is no way Powell tries to force even one rate hike like Yellen did in December 2015 into a global slowdown.  The question will be after the taper, will the Fed sit on the sidelines as the bubble pops, waiting for the economy to get worse before acting, or will they reinforce their bailout credentials and preempt the downturn by announcing QE infinity 2.0?  I think it will be the latter.  

But unless Powell decides to buy $120+B/month in equity ETFs on the backside of the bubble, he's not going to stop the bear market.  The Fed is all in on keeping stock prices high.  Powell is Draghi Part 2.  I'm sure he will try to do whatever it takes to keep stocks from going down, and try to be a hero, but in the process, guarantee stagflation and earn him the title of worst Fed chairman of all time. 

The SPX is forming the front side of a massive mountain, the biggest we've ever seen.  It likely goes over 5000 before the top is in.  The higher it goes, the harder the fall.  The back side will be painful for those that are unfamiliar with extended bear markets.  Bitcoin will be destroyed.  If bitcoin can go from 60K to 30K while the SPX is making all time highs almost every day, I can't imagine how low it will go when the SPX enters a full blown bear market.  Sub 10K is likely.  For those that think bitcoin is the new digital gold, you are off your gourd.  Bitcoin and SPX are positively correlated.  Just look at the historical charts. 

August 2011, August 2015, December 2018, and March 2020 were quick drops and quick recoveries.  They have conditioned investors to buy the big corrections, as the market always comes back and makes new 52 week highs within a few months.  But those big drops didn't come after these kind of astronomical equity inflows or household equity allocations.  Long term sentiment towards stocks was never this frothy in 2011, 2015, 2018, or 2020.  Its a different story now.  It will get interesting in 2022 and 2023, when I expect the volatility to come back with a vengeance.  

For the bears:  it will be your time coming up in 2022, if you can survive the parabolic up phase over the next 6 months.  

For the rational speculator:  either take a long break until spring 2022 or hold your nose and go long SPX for the next 4 months and get out before the top.  Or if you don't have FOMO, just wait for a high probability setup to buy on a dip and hold on till year end.