Look at the percentage of household financial assets invested in equities
CHAPEL HILL, N.C. — The stock market’s return over the next 10 years will be barely a third of its historical average.
That’s the sobering forecast of a stock-market indicator its creator calls—with some justification—the “single best stock market predictor.”
The brainchild of the website Philosophical Economics, it is based on the percentage of household financial assets invested in equities. It is a contrarian indicator, with high-percentage equity allocations leading to below-average stock-market returns over the subsequent 10 years—and vice versa.
Why haven’t you heard of this before?
My guess is that 10 years is too long a period to interest the typical investor, who is far more drawn to what the market will do this month or year. But some have paid attention to the indicator. Ned Davis Research, the quantitative research firm, for one, has been following it; Ned Davis calls its track record “remarkable.” I wrote about this indicator a year ago.
Regardless of the reasons for this indicator’s obscurity, its current message is clear. According to Ned Davis Research, the household equity-allocation percentage stands at 52%, versus a median level since 1952 of about 44%. Historically, allocation percentages as high as today’s were followed by 10-year annualized returns of below 4%.
In fact, as you can see from the chart at the top of this page, the only other times since 1952 in which households’ equity allocation got as high as they are now were followed—at best—by mediocre 10-year market returns: The late 1960s, 2000, and 2007.
A statistic known as the “r-squared” is useful for appreciating this predictor’s impressive track record. It measures the degree to which one data series explains or predicts another. Its highest possible reading is 1.0, while a 0.0 reading would mean the indicator has no explanatory or predictive ability whatsoever.
The table below reports results since 1952, as calculated by Philosophical Economics. In each case, the r-squared measures the correlation between the indicator in question and the stock market’s subsequent 10-year return.
Household equity allocation
Market capitalization to GDP
Q ratio
Shiller P/E (CAPE)
P/E based on 12-month trailing earnings
r-squared between indicator and
subsequent 10-year
stock-market returns
0.91
0.76
0.71
0.66
0.5
To put the household equity allocation’s 0.91 r-squared into even more context, most of the indicators that capture Wall Street’s attention have comparable r-squareds that are so close to zero as to be statistically insignificant.
So it’s definitely bad long-term news that the current household-equity percentage is higher than average.
Note carefully, however, that the equity-allocation indicator tells you nothing about the path the stock market will take in coming years to get to its overall mediocre result in 2026. It could be that the stock market undergoes a powerful bull market over the coming year or two before succumbing to a severe bear market. Or it could be that the market more or less muddles along producing mediocre returns year after year.
Regardless, though, the household equity allocation is telling us that we need to lower our expectations for average equity returns over the next decade.
For more information, including descriptions of the Hulbert Sentiment Indices, go to www.hulbertratings.com or email mark@hulbertratings.com
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