The Public Is Not In The Stock Market

 |  Includes: BLK, DIA, QQQ, SPY, TTFS
by: Howard Gold

As stocks keep hitting new milestones, more and more pundits worry we're in another stock market bubble. They cite record margin debt, euphoria over initial public offerings like that of Twitter (NYSE:TWTR), and, of course, the big run we've already seen in the major indices.

And they mention the growing involvement of Main Street investors in the stock market just as we're hitting all-time highs-a contrarian sign, if there ever was one.

The only problem is there's little evidence John and Jane Public are barreling back into stocks. In fact, the data shows, overwhelmingly, that the public remains wary of, if not hostile to, stock investing, and only a small number of affluent, adventurous individuals are doing the buying.

As of last week, investors had bought $144.6 billion of mutual and exchange traded funds (ETFs) focused on US equities and $187.1 billion in international equity funds and ETFs in 2013, according to TrimTabs Investment Research, based in Sausalito, California.

The total of $331.7 billion is the most since 2000, when investors plowed $324 billion into domestic equity mutual funds alone. And we all know what happened then. But look more closely. Of the $144.6 billion in domestic equity funds US investors have bought in 2013, only $24.4 billion went into US equity mutual funds; the rest poured into ETFs.

So, mutual fund investors contributed only 17% of the total inflows into all domestic US equity funds, so far, this year.

But a fund is a fund is a fund, right?

Not really. ETFs are not good barometers of broad individual participation in the stock market, because most aren't even owned by retail investors.

"More than one-half of all ETF assets are held by financial institutions-not individuals," John C. Bogle, founder of The Vanguard Group, wrote recently. "Financial institutions own 60% of all SPDRs, 59% of iShares (operated through BlackRock (NYSE:BLK)), and 41% of Vanguard ETFs."

And, Bogle pointed out, a recent Vanguard study showed individuals who own ETFs "are significantly less likely to be long-term investors, and significantly more likely to be short-term speculators."

They also represent a small sliver of the investing public.

According to the Investment Company Institute, only 3.4 million US households-3% of the total-owned ETFs in 2012, versus 53.8 million, or 44% of households, that owned mutual funds.

"ETF-owning households tended to have higher incomes, greater household financial assets, and were more likely to be headed by college-educated individuals," the ICI reported.

ETF-owning households had a median of $500,000 in financial assets, which include employer retirement plans, but not the value of a primary residence. That's eight times the $62,500 median financial assets of all US households.

Furthermore, the ICI found “more than half of ETF-owning households exhibit a willingness to take on substantial or above-average investment risk, [an] appetite [that] remained fairly steady through the market turmoil of the past four years.”

Indeed, while ETF investors actually put $251.2 billion into US equity-based ETFs from 2008 to 2012, Main Street investors dumped $547.9 billion worth of domestic equity mutual funds. Meanwhile, they poured $1 trillion into bond mutual funds during that time.

Seen in that light, this year's modest inflows to domestic equity mutual funds are the equivalent of putting a toe in the water (although mutual fund investors have been more enthusiastic about international stock funds).

Recent polls support that.

“Individuals have woken up to the fact that the market has gone up,” said TrimTabs founder and chairman Charles Biderman in an interview. “There are more and more people feeling better about the market and they're investing.”

But “those who have the money, and the wherewithal, are speculating. If you're not really making money, you're not going to invest it,” added Biderman, who also manages the AdvisorShares TrimTabs Float Shrink ETF (NYSEARCA:TTFS).

And demographics are at work, too: People who are near, or in retirement, are less likely to take the plunge, especially after the market crashes of 2000 and 2007.

“Even if they have money to invest, they don't want to put it into the market,” Biderman said. “Two-time losers are less likely to invest.”

What are they doing instead? “Savings vehicles are still attracting far more money than equity funds,” a recent report from TrimTabs said. “Savings deposits took in $416.0 billion in the first ten months of this year, which was 46% higher than the inflow…into all equity MFs and ETFs. While equity fund inflows have attracted lots of media attention, inflows into savings vehicles have remained even higher. Plenty of money is still being stuffed under the mattress.”

So, if Main Street investors are squirreling extra cash into accounts that pay nothing, rather than into a stock market that has been hitting new highs, are they really throwing caution to the wind? Or are they still scared out of their minds?