A report released by the Federal Reserve contradicts the widespread assumption that the bull market has been driven by individuals pouring money into stocks, specifically mutual funds, and broadly increasing equity exposure as they save for retirement.
A net of $86 billion was invested in mutual funds in 1995, while households sold $164 billion of their individually held shares, according to an analysis of the data by H. Vernon Winters, chief investment officer of Mellon Private Asset Management, Boston.
"According to the Fed's data, the mutual fund purchases do not reflect additions to stock ownership by individuals in total, but rather a shift from owning stocks individually to owning them through mutual funds," he wrote.
Individuals own $4.5 trillion of the $8.3 trillion of corporate equity in the United States.
"This recent Fed data indicates that individuals as a group are not recklessly adding to their equity exposure, although some undoubtedly are. Mature bull markets usually have ended with the public wildly enthusiastic about stocks. It is comforting that the market does not yet appear to be at this stage," he wrote.
"At the end of a bull market, the greed factor usually is overwhelming. While the enthusiasm for mutual funds is tremendous, much of the current dollar flow apparently is driven by the fear of not having sufficient funds for retirement years."
Excluding mutual funds, for each of the past 19 years, individuals have sold more stock than they have purchased. In the past couple of years, net sales have increased to a level several times greater than the rate of the early 1990s.
Even when individuals sell stock as a result of one company acquiring another company for cash, proceeds are not being immediately reinvested in the stock market. Instead, individuals are holding sizable amounts in short-term investments.
Mr. Winters concluded that the supply and demand forces evident in the Fed data have failed to greatly affect the stock market's moves.
"The liquidation of stocks by individuals did not prevent the market from increasing dramatically in 1995, and the buying pressure from baby boomers will not prevent dramatic declines as the overall bull market trend continues," he wrote.