Eyes On The Equity Prize

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."

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