Stock hype at all-time high

Ingrid Skjong

More of individual American wealth is tied up in the stock market than in the past half century, a report published Wednesday shows.
The 28 percent of household wealth invested is more than twice 1990’s personal stock holdings, a New York Times analysis of Federal Reserve statistics found. University professors downplayed the potential danger the increase could pose if the stock market were to fall.
“I think dangerous is a little strong,” said Paul Seguin, a visiting assistant professor of finance.
Researchers who conducted the Times analysis said stock market investment by individuals might be the highest ever, but they couldn’t say for sure because Federal Reserve statistics before 1945 are not as complete. Still, analysts found that people were investing more in stocks than traditional favorites — real estate, bonds and small businesses.
Two factors contribute to the increase in investors, Seguin said. Investing in the stock market is now cheaper and easier then it has been in the past.
Instead of paying brokers large amounts of money to invest assets, potential investors can do it themselves through their computers for a fraction of the cost.
“That’s made a lot of people try to jump on the bandwagon,” Seguin said.
People also see their friends do well in the market and want a piece of that success. The Dow Jones Industrial Average hit an all-time high Wednesday closing at 8,314.55. In the last three years, stocks in general have gained 30 percent annually.
“For the economy as a whole, more investments in stocks is beneficial because it funnels money into the private sector, which produces most of the new jobs in the economy,” said University Professor of Business and Government Bruce Erickson.
Yet every time the Dow experiences a slight downturn, pundits are primed to close the book on the booming market. Should there be another drastic fall — like that of October 1987 when the Dow dropped 22 percent on one day — having so many assets in one place could be troublesome.
“No good thing goes on forever,” said John Boyd, a finance professor in the Carlson School of Management.
Back then, only 13 percent of individual wealth was invested in the stock market. With mechanisms in place to prevent large falls on single days, few are ready to predict a market failure the magnitude of the 1929 crash, which helped trigger the Great Depression.
The 1929 market plunge sparked a nationwide panic because many investors had borrowed money from brokerage houses to buy stock. When stocks collapsed people couldn’t service their loans.
Seguin said people aren’t borrowing as much from brokerage firms today, but Americans hold considerable debt in other forms. Today, most debt comes from banks, credit card companies and other lenders, he said.
Some experts say a demographic breakdown of investors could be a more telling figure. Older households approaching retirement are usually not encouraged to heavily invest in stocks.
“If you’ve got a lot of money in the stock market and you’re retiring next year, the risks are very, very substantial,” Boyd said.
— Staff Reporter Brian Bakst contributed to this report.