Recently bond guru and DoubleLine Capital Co-Founder Jeff Gundlach gave his market outlook presentation for 2013 (pdf). As always the presentation was information packed, but the below chart really stood out to me.
You don't have to look very hard at the data for the US to see that this one chart smashes several widely held beliefs about US investors and markets.
Misconception number 1: Investors are over allocated to bonds.
The black portion shows the amount of household financial assets that are allocated to bonds. While US households do have a bit more allocated to bonds than other countries, I don't see how anyone could say that households are over allocated to bonds.
Misconception number 2: Investors have been scared out of equities
The blue area of the chart represents the amount of household financial assets that are allocated to stocks. As you can see from the chart, US households have almost double the amount of their financial assets allocated to stocks than the next closest country.
Misconception number 3: Lots of cash sitting on the sidelines
Going hand in hand with misconception number 2, many market pundits often comment how the recent rally in equities was especially impressive seeing as there is a lot of cash sitting on the sidelines that has been scared out of the market. As you can see from the grey area on the chart however, there doesn't seem to be a whole lot of cash sitting on the sidelines.
There may be one issue with this data however:
As Gundlach commented in his presentation the graph does not necessarily represent the average household. The very wealthy could skew the data to the point where it is not very representative of the average American's allocations. Even with that however, its pretty hard to argue that investors are over allocated to bonds, have been scared out of the equity market, and that there is lots of cash sitting on the sidelines.
The two main points that investors can take away from this:
1. There is not a lot of cash sitting on the sidelines waiting to flow into the equities market. This is a negative for US stocks and means that the rally in equities over the last several years has a greater chance of fading than would otherwise be the case.
2. The data does not support the thesis that investors are over allocated to bonds. This (combined with the fact that there is still plenty of money allocated to equities which could be scared out if the market sells off), makes the case for bonds more bullish than it would be otherwise.