Who Owns the Stock Market? (EP.366)

Episode Summary

Executive Summary: The episode argues that the market’s quiet strength reflects a long bull market and strong earnings, not euphoria. The hosts discuss secular return cycles, the surprising resilience of a global 60/40 portfolio, Europe’s relative decline versus the U.S., the rise of private credit, mixed investor sentiment, housing’s stagnation, consumer spending strength, and record travel/concert demand. They also emphasize that timing markets and policy changes is extremely difficult.

Main Topics: Bull market durability and secular return cycles (Priority: 5/5): Michael highlights that the S&P 500 keeps hitting highs with unusually low volatility, then contrasts today’s returns with historical long cycles of above- and below-average equity performance. The point is that predicting the end of secular bull markets is nearly impossible. Return expectations versus reality (Priority: 5/5): A Morningstar lookback shows that even the most optimistic return forecasts from 2014 were far too low relative to what the S&P 500 delivered over the next decade, reinforcing how hard it is to forecast long-term market returns. Global 60/40 portfolio and bond drawdowns (Priority: 4/5): John Authers’ chart of a global 60/40 portfolio reaching new highs despite bond pain underscores how equity strength has offset fixed-income weakness and revived classic balanced portfolios. Europe’s relative economic and market decline (Priority: 5/5): Several charts show Europe losing share of global GDP, market cap, productivity, and venture scale relative to the U.S., while tourism is one of the few bright spots supporting parts of Southern Europe. Investor positioning: private credit, passive flows, and mixed sentiment (Priority: 4/5): The episode notes that insurers like private credit, institutional investors are conflicted on equities, and passive funds/ETFs still represent a modest share of market ownership despite taking much of the flow attention. Housing, rate cuts, and policy transmission (Priority: 5/5): The hosts argue that rates may need to come down to relieve the housing market, which is marked by weak sales, falling permits, and low inventory. They discuss whether rate cuts or MBS purchases could help unlock supply. Consumer spending strength and cultural spending trends (Priority: 4/5): Record concert attendance, expensive tickets, and robust travel demand suggest affluent households are still spending heavily. The hosts also note that the top income quintile drives a large share of consumer spending.

Key Arguments: Bull markets tend to look boring in real time because they grind higher with few dramatic declines, unlike bear markets that dominate headlines. Long-term market forecasts often understate returns; even optimistic 2014 estimates were far below the S&P 500’s actual 10-year result. It is nearly impossible to identify when a secular bull market ends while living through it; historical analogies only become clear in hindsight. The classic 60/40 portfolio looks better than expected because stocks have carried the mix while bonds recover from a deep drawdown. Europe’s economic and capital markets have materially lagged the U.S. since the financial crisis, with tourism acting as a temporary support rather than a structural solution. Private credit is attractive to institutions because it offers yield without daily mark-to-market volatility, even as many investors worry the credit cycle is late. The Fed’s restrictive stance is most damaging in housing; lower rates could help revive construction, unlock inventory, and stabilize a key sector of GDP. Consumer demand remains strong, especially among high-income households, which is visible in travel, concerts, and premium experiences. Passive indexing is important on the margin, but it is not a dominant share of total ownership; the bubble narrative is overstated if framed only through ETF ownership. Geography and timing matter enormously for retirement outcomes; starting dates can overwhelm skill or discipline in long-term wealth accumulation.

Data Points: S&P 500 all-time highs through Friday: 31 - Count of new highs mentioned as evidence of persistent bull-market strength Daily gains of 2%+ in 2024: 1 day - Used to show how muted market volatility has been this year Daily gains of 1%+ in 2024: 14 days - Illustrates low-volatility market behavior Daily declines of 2%+ in 2024: 0 days - Shows absence of major drawdowns this year Daily declines of 1% or worse in 2024: 7 days - Further evidence of a calm bull market S&P 500 return over past 10 years to 2014 lookback: 12.69% annualized - Actual return versus much lower forecast estimates S&P 500 return since start of 2009: 14.5% annualized - Long-run compounding cited as extraordinary Mainstream forecast (2014 lookback): 11% - Highest return estimate cited in the Morningstar retrospective Expert forecast (2014 lookback): 7.5% - Intermediate estimate in the forecasting comparison Pessimist forecast (2014 lookback): 2.5% - Low-end estimate in the forecasting comparison Global 60/40 portfolio all-time high: Yes - John Authers chart showing classic balanced portfolio at a new peak NVIDIA market cap vs major European markets: Bigger than UK, Germany, and France combined individually - Deutsche Bank chart emphasizing U.S. mega-cap scale Europe’s global market cap share since 2000: From about one-third to a little over 15% - Economist chart on Europe’s shrinking equity-market relevance Europe’s global GDP share since 2000: From nearly 40% to 25% - Shows Europe’s reduced economic weight U.S. vs Eurozone/UK productivity divergence: Post-GFC divergence widened sharply - FT chart used to highlight structural U.S. outperformance U.S. venture-backed unicorn count/value context: China close to U.S.; Europe far behind - Chart on billion-dollar venture-backed companies NVIDIA largest in S&P 500 history: 12th company since 1926 - Howard Silverblatt/S&P stat on largest-company turnover NVIDIA employee stock grant example: $10.6 million - A hypothetical $70,000 annual stock grant over four years at Nvidia five years ago U.S. stock prices expected higher in 1 year: 40% - Consumer expectations survey average mentioned after rate-cut talk Average expectation in the survey: 45% - Benchmark average for the stock-price sentiment chart Passive mutual funds + ETFs ownership share: 14% - Goldman ownership breakdown showing passive share is still modest Active mutual funds ownership share: 12% - Compared with passive ownership to challenge bubble narratives Households’ ownership share in the 1940s: 95% - Historical comparison in the ownership chart Money market fund interest income: $500 billion - Annual interest paid on money market balances Money market interest as share of consumer spending: 2.5% - Torsten Slok framing to put the cash yield in perspective Highest-income quintile share of consumer spending: ~40% - Used to argue affluent households drive much of consumption Second and lowest income quintiles share of consumer spending: 22% combined - Shows lower-income groups still account for meaningful demand Average share of income spent on groceries in the U.S.: 6.7% - Our World in Data comparison showing the U.S. lowest globally Zach Bryan concert ticket price: $600–$700 per ticket - Example of expensive live entertainment demand Billy Joel ticket price: $900+ cheapest seats - Illustrates rising concert prices and strong demand Concert ticket prices over decade: Nearly doubled - Wall Street Journal trend mentioned in discussion Top 100 North America tour ticket price increase over 5 years: +40% - Shows rapid inflation in premium live-event pricing U.S. South population growth since pandemic: 2.7 million - Bloomberg story on migration to Southern states Tennessee GDP growth 2019-2024: Nearly 8% - Compared with Germany’s 1% growth in the same period Germany GDP growth 2019-2024: 1% - Used in the Europe tourism discussion New home construction pace: Slowest since June 2020 - Bloomberg report cited in housing discussion Existing home sales: Weak/low - Michael McDonough chart on stalled housing activity Institutional survey responses on private credit: 53% expect highest total return - Goldman Sachs insurer survey result Insurers planning to increase credit risk: 35% - Despite late-cycle concerns Insurers worried credit cycle is late-stage: 59% - Shows tension between yield-seeking and risk awareness J.P. Morgan institutional survey equity appetite: 17% - Likelihood to increase equity exposure over coming days/weeks Bank of America fund manager sentiment: Most bullish since November 2021 - Contrasting signal to weak J.P. Morgan risk appetite VOO vs annual flow record: $5 billion away from $44.5 billion record - Potentially set to beat SPY’s annual flow record SPY expense ratio: 9 bps - Compared with VOO to explain flow migration VOO expense ratio: 3 bps - Cheaper fee as driver of ETF flows

Pivotal Quotes: "Bull markets are kind of boring." — Michael Batnick: Opening observation about why strong markets feel uneventful compared with bear markets "No one thought this was possible." — Michael Batnick: On how far actual S&P 500 returns exceeded forecast expectations over the last decade "Most of the time stock go up. Sometimes they go down." — Ben Carlson: Summing up the simplest and most durable market truth amid all the bearish forecasts

Implications: Investors should expect long stretches of calm strength and avoid overconfidence in forecasts. Housing remains the clearest policy pressure point, Europe faces structural headwinds, and consumer spending is still resilient. The episode favors humility, diversification, and attention to flows, incentives, and timing.