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Emerging Trends in Capital Markets

One significant trend that I have been following is the shift in ownership of the US equity market.

In fact, there are actually two underlying trends in play here. The first trend is the shift between retail and institutional owners. The below graphic using data from the Federal Reserve shows the overall ownership trend going back to the 1960’s. The overwhelming majority of US equities is traditionally owned by US household and individual investors, but this percentage has been falling steadily until very recently. Institutional owners—represented by pensions, businesses, and insurance on this graph—bought an increasingly larger share of the market.

Source: Ben Marrow; Blog-Normal; Data: US Federal Reserve

This trend has been reversing recently: the percentage of US stocks owned by retail investor bottomed out during the Global Financial Crisis. Over the years since the GFC, ownership of US equities among households and individual investors has been increasing at the expense of institutional investors. The closure and freezing of defined benefit pension plans is obviously a contributor to declining levels of institutional ownership, but increasing allocations to alternative asset classes such as private equity have also played a big part in this trend. The AAII allocation survey of individual investors illustrates the present trend of higher allocation to stocks versus historical average. And higher prices mean larger dollar values held by retain investors. In fact, a recent University of Michigan survey indicated that the value of stocks held by US households has exceeded $250,000, a record and two times higher than the median value held in 2020.

The second trend, which is clear from the Federal Reserve data, is increasing foreign ownership of US equities. While this trend goes back many decades, foreign interest in US stocks accelerated over the two years. The AI/Mag 7 momentum combined with the strengthening US Dollar is a key driver. The sheer volume of foreign capital flowing into the US stock market is staggering. This graphic from Macrobond illustrates how much more foreigners have been buying in US equities relative to US investors buying foreign stocks. Some recent data has emerged suggesting that some foreign capital has been shifting out of US equity markets, and thusly this trend may not be as persistent in the long run as the above trend regarding US households.

Source: Bloomberg; Macrobond

Investment managers are incorporating these trends into their strategic growth strategy. The ability to successfully target retail and foreign investors is vital for US-based asset managers simply to maintain their market share, much less grow. And it is an area that Northern Trust is focused on supporting.

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Grant Johnsey

Grant is responsible for delivering capital market solutions to institutional clients across agency brokerage, transition management, security finance, and foreign exchange.

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