What a Gallup Poll Tells Us About Equities

A lot of attention is being given to a Gallup poll showing that the general population is unaware of the bull market in stocks.  Only 24% knew the stock market had risen more than 20% last year. 30% said stocks were flat to lower last year.

Is their lack of stock market knowledge surprising?

It would be easy to poke holes at Gallup who famously called the comfortable victory for President Romney in 2012. But the Gallup poll on stocks is probably fairly accurate.

When polled, here are other things a third or so of Americans didn't know:

1. The name of the world's largest ocean, to the west of California.
2. The year 9/11 took place.
3. The name of the country the American Revolution was fought against.

And a third or so believe:

1. The earth is the center of the universe.
2. Ford Foundation, Rockefeller Foundation and Monsanto are trying to shrink the world's population using GMO foods.
3. Someone they know has been abducted by aliens.

Weekly Market Summary

The first half of 3Q is done. So far, it's been a mess for equities worldwide. Europe and RUT are down 5-6% and SPX and DJIA are negative. Only Nasdaq and emerging markets show gains.

In the US, only technology and health care have advanced; all the other sectors are in the red.

Surely the biggest surprise has been treasuries. After outperforming SPX by 680 bp in the first half of the year, treasuries (using TLT) have taken another 600 bp in just the past 6 weeks (purple bar, above).

A Primer on Fund Flows

You might have seen a chart that looks like the one below (original link is here). It shows "net new cash flow" for domestic equity funds. And the message from the chart seems to be that domestic equity funds are seeing large outflows. In other words, this is a bull market in which Main Street America is not participating.

The subtext is that once mom and pop decide to get back into the market, it will really take off.

Fund Managers' Current Asset Allocation - August

Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $700b in assets.

An extreme in bullish equity sentiment was reached in July, with fund manager equity weightings at +61% overweight, the second highest since the survey began in 2001. This was a clearly identified risk to near term equity performance (post). Since then, the Euro 350 has dropped 8% and SPX has dropped 5%.

In response, equity allocations have fallen to +44% overweight in August. There's good news and bad news in this.

The bad news first. Is this a washout? No. As we have continually noted, what has been remarkable is how long managers have been highly overweight equities (virtually since the start of 2013). This is longer than any period during the 2003-07 bull market (yellow shading). In the past, after overexposure like that seen in the past 18 months, a washout low would be marked by an equity weighting under +20% (green circles). By that measure, equities are highly over owned.

Now the good news. The current bull market is nothing if not persistent. Equities have not been less than +36% overweight since early 2013. If this is buy support again, then weakness in August will likely mark a low in the next month like those in February and April.

Are Investors Fighting the Trend Higher in Equities?

Investors have been fighting the trend higher in equities. 

This has been a regularly repeated theme among many pundits over the past year. Is this assertion supported by data?

Below is the Federal Reserve's most recent report (1Q14) on equity holdings as a percentage of household financial assets (chart from Short Side of Long).