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Eyes On The Equity Prize

Economic Trends


Households aren't net buyers--yet

As many observers see it, if there is one factor behind the U.S. stock market's incredible performance last year and its continued rise in early 1996, it is the unprecedented surge in household purchases of equity mutual funds. Indeed, the Investment Company Institute reports that equity funds experienced a veritable tidal wave of demand in January and February, racking up net sales of around $50 billion.

Focusing on purchases of mutual-fund shares, however, could dramatically overstate American households' demand for corporate equities--at least up to now. The Federal Reserve Board's flow-of-funds data indicate that households last year were huge net sellers of equities they held directly--disgorging some $168 billion worth of stocks, more than enough to offset an estimated $128 billion worth of purchases of equity funds.

This is nothing new. Aside from 1992 and 1993, Fed data show households have been heavy net sellers of equities since the early 1980s. Yet stock prices have moved dramatically higher through most of this period, spurred by falling interest rates, steady economic growth, and a net decline in equities in the wake of stock buybacks and continued merger and acquisition activity.

Indeed, economist Edward E. Yardeni of Deutsche Morgan Grenfell/C.J. Lawrence Inc. points out that the big factor stimulating household direct sales of equities over the past decade has been the retirement of stocks via mergers and buybacks. Net purchases of equities (including fund shares) by households have actually moved almost in tandem with net stock issuance. "Rather than being active sellers," says Yardeni, "household investors have tended to passively pocket the capital gains provided by mergers and stock buybacks."

The good news is that households may now be putting more cash into stocks and becoming net buyers. Yardeni notes that the surge in equity fund sales has been matched by a record flow into savings accounts and money-market vehicles. And the personal savings rate is rising--from 3.8% in 1994 to 4.8% late last year and 5.3% in January.

"The stock market," says Yardeni, "may finally be starting to feel the effects of the baby boomers entering their top earning and savings years."BY GENE KORETZReturn to top

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Shipments to Europe are way off

Economic observers have been counting on expanding exports to keep the sluggish U.S. economy moving ahead in 1996. After all, exports were one of the star performers in the U.S. economy last year, accounting for some 44% of 1995's growth and rising at a nifty 10.9% annual rate in the fourth quarter.

Now, however, a warning flag has suddenly appeared--in the form of the export order index of the National Association of Purchasing Management. The index, which represents the difference between the percentages of exporters reporting higher and lower orders, registered zero in both January and February--the worst two-month showing since it was initiated in 1966.

The big factor in the sudden flattening of export orders, says Maury N. Harris of PaineWebber Inc., appears to be a drop in demand from Europe, where slow growth has been exacerbated by unusually harsh winter weather.

What has not changed, though, is the competitiveness of U.S. exports, which are still positioned to benefit from any pickup in foreign economic activity. Economist Michael Moran of Daiwa Securities America Inc. notes that even with a relatively weak dollar, U.S. goods producers have been steadily lowering their export prices since mid-1995.BY GENE KORETZReturn to top

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