Americans’ stock holdings are at an all-time high, a trend that has proved positive as the markets have continued to climb. However, experts are now warning that this has left many overly exposed to a potential slump.
Direct and indirect stock holdings account for 45% of American households’ financial assets in the second quarter, according to data from the Federal Reserve Bank of St. Louis.
This record-setting level of stock ownership can be attributed to a number of factors, CNN reports. For starters, stocks have hit record highs in the last few months, boosting the value of holdings and incentivizing more Americans to participate. Additionally, retirement plans that involve investing in stocks, like 401(k)s have risen in popularity over the past two decades.
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Generally speaking, this increased investment in the stock market is a good thing as it allows more individuals to benefit from corporate gains. But it’s not all positive.
LPL Financial (NASDAQ:LPLA) Chief Economist Jeffrey Roach told CNN that because so many people now have so much of their wealth tied up in stocks, the market has an increasing amount of influence on our economy.
“The impact of a stock market melt-up or a meltdown — it goes both ways — is going to be much more impactful across the economy than, say, just a decade ago,” he said.
Ned Davis Research U.S. Sector Strategist Rob Anderson said that history has demonstrated that when stock ownership levels hit record highs, the risk of a downturn in the market and below-average returns increases.
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“Investors shouldn’t expect the same magnitude of returns that we’ve seen during the last decade to repeat,” he told CNN. “Going forward, over the next 10 years, there’s probably going to be a downshift in returns.”
There are also concerns that this level of engagement in the stock market is distorting economic data and painting a much better picture of our current economic state than many Americans are actually experiencing.
Kevin Gordon, a senior investment strategist at Charles Schwab (NYSE:SCHW), told CNN that market gains like the ones we’re currently experiencing can spur consumer spending. However, when those gains slow or reverse, that spending can dry up quickly.
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