The US stock market going up has become a political imperative.
The chart below from my friends at ASR shows how equities today represent the highest percentage of US households’ portfolio holdings in recent history.
In the past (e.g. 2000), every time households became heavily allocated to equities it was a sign that euphoria was running wild.
Inevitably, severe drawdowns ensued and a significant portion of US household wealth was wiped away.
But ever since the pandemic, policymakers seem to have embraced a new political imperative.
’’The stock market can’t go down’’.
Sure, the standard pullback in the 5-10% is not seen as scary.
But move into the ~20% drawdown territory, and we have seen policymakers run for the hills over and over again (e.g. Trump’s TACOs, Central Banks forgetting their inflation mandates).
In turn, this has generated perverse incentive schemes for households.
’’If the policymakers have my back, my asset allocation should be way further out on the risk curve’’.
What do you think of such a setup?
Should Central Banks remain behind the curve and politicians pursue aggressive fiscal policies to support economies and asset prices?
And should households adjust their risk tolerance because of that?
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