The high interest rates over the last few years have led to the explosive growth of cash holdings, including certificates of deposit (like guaranteed investment certificates (GICs) in Canada) and money market funds. Cash holdings in the fourth quarter of 2023 increased by $270 billion to $18 trillion. Despite that relatively small increase, the rise in value of U.S. equities has led to American households to hold more of their wealth in equities than at any point in history (save the dot-com boom in 2000).
There are likely many reasons for this shift, but these factors could likely be the most prominent influences:
- It’s just simple math, since U.S. stocks are on such a long “winning streak” post-2008, the value of those assets is going to be worth more relative to other assets.
- As companies complete the shift from defined-benefit pension plans to defined-contribution plans, it’s possible more stocks are being purchased at the individual level.
- The average investor got smarter thanks to much more accessible information. Consequently, they now understand the long-term wealth-creating potential of owning large companies (both domestically and internationally).
- Millennials and older Gen Zers are sticking around in the stock market after being introduced to it during the meme-stock and pandemic world of 2021.
- There hasn’t been a brutal bear market for U.S. stocks since 2008. Sure, there were substantial pullbacks at the start of the COVID-19 pandemic, and then again in 2022. But, those were relatively short-lived. When the stocks did come back, they returned in a massive way—thus, rewarding buy-and-hold investors.
A contrarian investor might say this indicates an oversold market. We’re not so sure that’s the case. Given the long-term track record of U.S. stocks, we’d be surprised to see stock allocations fall below 35% of household assets in the foreseeable future. That’s as low as it got during the worst days of the pandemic. There has been a durable paradigm shift in how investors see the stock market from a risk/reward perspective.
Canadian investors aren’t doing so bad either. We hit a record high last quarter for financial assets of $9.74 trillion, and overall net worth reached $16.4 trillion. Financial assets (shorthand for stocks and bonds) increased overall net worth by about half a trillion bucks, while residential real estate was down about $158 billion. Household debt was up 3.4%, but that’s actually the slowest rise in debt since 1990, and the debt-to-income ratio actually fell slightly.
Will new corporations spin off more value?
When big corporations buy new companies or dive into new lines of business they often tout the advantages of integration and synergies. The theory goes that the asset will be more valuable as a cog in the bigger machine. General Electric (GE/NYSE) and 3M (MMM/NYSE) are two of the world’s largest industrial companies and it was interesting to see them move in the opposite direction this week.
In contrast to the bigger-is-better theory, companies can sometimes get too big and be hindered by layers of bureaucracy. In that case, the spin-off idea is put forward, in which a part of the company will be separated into its own entity so it can focus on providing a narrower product or service. The more narrowly-focused company should, in theory, excel as it’s no longer distracted by the tangle of corporate machinery at the parent company.
GE completed its corporate restructuring last Wednesday, as the former parent company has now been divided into:
- GE Vernova (GEV/NYSE): The energy assets of the old GE.
- GE Aerospace (GE/NYSE): The old GE market ticker continues on as a pure aerospace company.
- GE HealthCare (GEHC/NASDAQ): GEHC was successfully spun off in late 2022, and is up about 57% since it started trading.
GE Aerospace shares finished down 2.42% on their first day of trading, while GE Vernova was down 1.42%.
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