American households are expected to dump $750 billion worth of stocks this year in favor of less-risky assets.
This is the first annual drop in demand since 2018, due to higher bond yields and lower savings, reported Goldman Sachs Group strategists, led by Cormac Conners and David Kostin, on March 22.
The strategists said that the era of TINA (“there are no alternatives” to stocks) is over and that the era of TARA (“there are reasonable alternatives”) has begun.
Goldman estimated that households will sell $750 billion in equities by the end of 2023, although the amount could jump to as high as $1.1 trillion.
If this year sees lower yields and a higher-than-expected savings rate, the dump in stocks could be little as $400 billion.
U.S. households are expected to instead boost allocation to domestic bond and money-market mutual funds, said Conners.
Households Pull Out of Falling Equity Market
The Goldman strategists think that the increase in interest rates by the Federal Reserve to combat inflation likely contributed to the change in household investor priorities.Millions of Americans had bought into the stock market during the era of easy monetary policy and almost-zero interest rates after the global financial crisis of 2008–09.
From the start of 2020 to mid-2022, households were net buyers of $1.7 trillion in equities, but demand for those assets fell 40 percent, to $480 billion last year.
“Adjusting the Fed’s household demand series for our estimate of hedge fund net equity demand (which is included in the household category by default) implies households were net buyers of just $209 billion in equities in 2022, a 78 percent decline from 2021,” they added.
When the Fed started to tighten the money supply last year, the long-term trend saw a “significant slowdown” starting in the third quarter.
However, households still directly own 38 percent of the total U.S. equity market, according to central bank data.
“Even if the recent decline in market yields persists or deepens through year-end, households would still be net sellers of stocks” this year, wrote Connors.
The report noted that $51 billion has flowed out of equity mutual funds and exchange-traded funds (ETFs) so far in 2023, while $282 billion have moved into money-market funds and $137 billion into bond funds, citing high-frequency flow data.
Foreign Investors Expected to Pick Up the Slack
Conners wrote that his model for domestic household equity demand is based on the 10-year Treasury yield and average personal savings. The researchers said that higher yields and lower savings tend to go in hand with decreasing demand for equity among households.
The 10-year Treasury note is expected to rise from around 3.6 percent currently to 4.2 percent by the end the year. The personal savings rate will rise to 5.3 percent from 4.5 percent, said Conners.
The Goldman team said that level of stock selling would reverse six previous quarters of household equity demand.
With households pulling back, he said that foreign investors and corporations will likely step in and purchase $550 billion and $350 billion in U.S. equities this year, respectively, while pension funds will buy an additional $200 billion.
“We expect buyback and cash M&A activity will slow but remain relatively robust this year, driving corporations to be net buyers of U.S. stocks–though a potential [second-half] recovery in equity issuance presents one risk to this forecast,” wrote the strategists.“A weaker dollar should drive foreign investors to be net buyers of U.S. stocks in 2023. Pension funds will also be net buyers of $200 billion in equities in 2023,” they concluded.
