Stock Allocations Hit a Nine-Year High... But That's Not a Bad Sign

The current bull market recently had its 4th birthday. And looking further back, stocks have mostly moved higher for the past 17 years.

Make no mistake... We're in the late stages of this boom.

That doesn't mean it has to end soon. But in a world where stocks have mostly risen for two decades, you should expect to see some signs of investor greed.

One of them is folks owning a lot of stocks.

That makes sense when markets have been rising year after year. Folks see the gains and keep buying more... allocating larger and larger chunks of their portfolios to the stock market.

Right now, mom-and-pop investors own more stocks than they have since 2017. But while that's a sign that we're in the late innings of the boom, it's not a death knell for the bull market.

Instead, history shows the market could rise double digits over the next year...

Stocks Don't Crash Just Because Everyone Owns Them

The psychology at work here ties into a key market adage: Past performance is not indicative of future results.

That's one of the most common disclosures in financial markets. It's required language for good reason...

Our brains are wired to connect the dots – and often, we take our conclusions too far. We assume that if the past was good, the future will be too.

That's why folks want to own more stocks near the end of a bull market. And that's exactly what we're seeing lately, through data from the American Association of Individual Investors ("AAII").

You might know the AAII for its weekly sentiment survey, where it asks regular investors how they feel about the market. But the AAII also performs a monthly survey with additional questions.

One of those questions is what percentage of respondents' portfolios are in the stock market. This figure has been on the rise for years. And it recently hit its highest level since 2017. Take a look...

As of September, mom-and-pop investors had 71.8% of their portfolios in stocks. Except for a single month in 2017, that's the highest allocation since 2000... when the dot-com bubble was beginning to burst.

That's not a calming comparison. But we need to study the data further to see if this is actually a bad omen for stock prices.

I looked at each unique instance where this reading rose above 70%. That has happened 10 other times going back to 1987. And surprisingly, it has been a positive sign. Take a look...

If everyone already owns a lot of stocks, you're probably late to a bull market. But that doesn't mean the bull market is over.

Similar setups led to gains of 5.7% in three months, 10.5% in six months, and 11% over a year. That's solid outperformance across the board compared with buy and hold. And the market was higher a year later 75% of the time.

This isn't a perfect indicator. Its worst signal came in June 2000. That was near the top of the dot-com boom... just before the market got cut in half. But that crash didn't happen all at once. Even that ill-timed signal only led to a 16% fall over the next year.

Share prices have been falling in recent weeks − but not because folks own a lot of stocks. Allocations are always high this late into a bull market.

That's clearly where we are today. And despite the recent volatility, history tells us we should expect stocks to move higher in the months ahead.

Good investing,

Brett Eversole