BANK OF AMERICA: Millennials could signal the 'big top' in the market
According to Bank of America Merrill Lynch strategists, a rise in millennial participation in the market could be a sign of the top.
"You'll know it's the "big top" when millennials start buying (new investors a classic late-cycle signal); recent survey by AMG shows millennials have just 30% in equities versus 46% for older age groups," said Michael Hartnett, the chief investment strategist, in a note on Friday.
The chart below shows that among various asset classes, the widest allocation gaps between millennials and older investors are in alternative investments, which the 18-34 demographic prefers, and in stocks, where millennials could play catch up.
For Hartnett, millennial buying would signal the top. But that's not to say there aren't other late-stage signposts.
Hartnett said the US stock market capitalization as a percentage of nominal GDP - which Warren Buffett called the best measure of valuation - is on track to hit an all-time high. He also cited the surge of flows into tech funds, which are moving at the fastest annualized rate in 15 years.
But so far, there's "limited irrational exuberance" in the flows and positioning among older, institutional investors, Hartnett said.
The bank's weekly examination of fund flows reflected outsized bets on deflation over higher inflation.
According to BofAML, the 4% drop in oil prices this week represents the "poster child" of this deflationary narrative. Also, investors moved money out of funds that invest in bank loans for the first time since the week of the US election, and the defensive utilities sector had the biggest inflows in nearly a year.
The continued rise of mobile trading platforms, which bring the market into an ecosystem that millennials already spend much of their time on, could be a key driver of participation going forward. For example, Victor Jones, the director of trading at TD Ameritrade, told Business Insider last week that millennial clients make up 40% of the brokerage firm's new customers, with over half of their trades coming from mobile devices. Their trades, he noted, tend to skew towards futures and derivatives.