Unbalanced portfolios have proven to be vulnerable to abrupt and sharp corrections. Will history repeat?
The most significant vulnerability for household portfolios is a sharp rise in market interest rates. And the odds of that happening in 2021 are far greater than what is expected by investors.
In 2020, household net worth increased an astonishing $12 trillion, nearly half of which was due to unprecedented gain in equities' market valuation. The boost in equity values ($5.7 trillion) was the second-largest on record, bettered only by 2019 gain, and the fact that it occurred in a year marked by recession makes it even more unusual. In the recessions of the early 2000s and 2008/09, declines in household equity holdings were in the trillions of dollars.
The surge in wealth lifted the ratio of household net worth to income to a record 753%. That's 100 basis points above the highs recorded at the housing bubble's peak and nearly 150 basis points over the tech-equity bubble period. High wealth to income ratios are not predictive but have proven to be signs of vulnerability and tipping points.