LOOK WHO'S SELLING STOCKS
Many individuals are taking gains
A common assumption about the stock market's spectacular performance in recent years is that it has been reinforced by escalating public demand for stocks. Yet the statistical evidence indicates otherwise, reports economist Daniel E. Laufenberg of American Express Financial Advisors Inc. "Surprisingly," he says, "the household sector doesn't appear to be increasing its overall equity investments."
To be sure, household purchases of equity mutual-fund shares have exploded. The Federal Reserve counts a cumulative $760 billion from 1992 to 1996, and industry sources add $71 billion so far this year. But Laufenberg notes that Fed flow-of-funds data also indicate that households have been heavy net sellers of stocks they held directly for much of the past decade--disgorging a record $245 billion worth of such shares in 1996 alone, compared with $158 billion worth of equity fund purchases. Even counting indirect stock purchases through pension and life-insurance funds, Laufenberg figures that household equity sales exceeded purchases by about $62 billion last year (chart).
Why would households reduce stock holdings when the market is so buoyant? Part of the answer seems to lie in the surge in share buybacks and cash acquisitions since the early 1980s. Evidently, many households have chosen to pocket some of the cash provided by mergers and buybacks rather than funnel all of it back into equities.
The bottom line, says Laufenberg, is that the market boom is less a function of surging demand than a response to such positive economic developments as strong earnings, low inflation, and low interest rates. So rather than worrying about "irrational exuberance," the Fed should concentrate on maintaining a benign economic environment.
That's doubly important, he adds, because of the growing dispersion of stock ownership--from just 31.7% of families in 1989 to over 41% by 1995. This trend suggests that the sales of directly owned equities noted above occurred mainly among relatively affluent longtime stock investors who decided to put some of their capital gains to other uses.
Thus, while the household sector as a whole has been selling equities, a growing number of households are recent purchasers who have never experienced a severe market decline. "The uncertainty of their reaction to falling stock prices," says Laufenberg, "is one more reason why the Fed must tread carefully as it tries to keep the economy on an even keel."BY GENE KORETZReturn to top
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DO `SWEEPS' SAP FED POLICY?
A growing bank practice stirs fears
Is the Fed's ability to conduct monetary policy under threat? Some observers worry that the agency is losing control of its main policy target--the federal funds rate, which is the interest rate that commercial banks charge each other for overnight loans to meet the Fed's reserve requirements.
The purported culprit is rising "sweep" activity by commercial banks. Because reserve balances earn no interest, more and more banks have been using computer programs to sweep excess funds overnight from checking accounts, which are subject to reserve requirements, into money-market savings deposits, which are not. In recent years, they have swept more than $180 billion out of checking accounts and thus cut required reserves by nearly $18 billion.
The problem, contend some, is that this has reduced both the banks' margin for error in calculating required reserves and the pool of funds they can turn to when they run short. As a result, the fed funds rate has become a lot more volatile--making it harder for the Fed to keep the rate at its target level.
The good news is that such fears are exaggerated, according to a new study by the Federal Reserve Bank of New York. It finds that the intraday volatility of the funds rate has risen somewhat, with the gap between daily highs and lows reaching as much as two percentage points in the past year. But that rise is still modest by historical standards. More important, reports the bank, there has been no pickup at all in the volatility of other interest rates--indicating that the Fed's ability to influence interest rates is as strong as ever.BY GENE KORETZReturn to top