• This is the kind of headline that makes a contrarian want to hit the exits – When everybody’s in who will be left to buy?

• The stats and interview commentary that accompany this headline from a prominent financial daily  are pretty scary too given a lack of historical perspective.

• We provide the prospective to quell the nail-biting.

“Bull Markets … Die in Euphoria”

According to investing giant Sir John Templeton euphoria (people loving stocks) is always the end stage of a bull market after a prolonged period of fear, disgust and distrust brought on by the previous bear market. Based on my experience it always seems to work this way. This has been a constant in my writing. As the media and pundits continue to try to call tops to this secular bull, I have argued that we’re not there yet.

“Americans Can’t Get Enough of the Stock Market”

This is the title of the lead headline of this Sunday’s edition of the Wall Street Journal (5/2/2021-you will need a journal subscription to view). This assertion should be a red flag that we are nearing the end of this great secular bull market. Importantly the article is backed up by what appear to be very significant factual information and interviews with enthusiastic market participants. All of this data on a superficial basis would seem to scream “look for the exits.” I would say careful examination of the sentiment-negative issues raised by the article is warranted before contemplating hitting the exits or worrying about moving money away from the market.

Perspective to quell the nail-biting

1.  “Individual investors are holding more stocks than ever before … .” As of April the percentage of equity holdings held by households is a record 41% (since 1952). This would be very scary if considered in a vacuum but we are not in a vacuum and there are statistics in the same article that show the percentage of equity ownership at the previous peak in Y2K to be nearly 38% and that is with S&P 500 at 1550. The S&P closed at 4181 Friday April, 30, up 169% over the 21-year period. You would think this might lead to a slight increase in percentage household stock ownership (by virtue of capital appreciation alone).

2. “Retail  clients at Bank of America Corp have bought stocks for nine consecutive weeks, while hedge funds and other big investors have fled the market, analysts at the bank said in a note April 27.” Admittedly there are a lot of newbies and stimulus supplied dollars in the market lately. This does represent risk, especially in those stocks where they may be heavily committed, a la GameStop. One of the newbies quoted in the article, a 44-year-old physicians assistant, related that he learned about the market on social media during a pandemic-related furlough.  Another, a 31-year old software engineer was quoted saying, “What better place to create money like everyone else than to start to playing the stock market.” Admittedly this does sound like Y2K talk (the 31-year-old was 10 and the other interviewee was 23). My view on this is that there is speculation and euphoria on the part of many very small investors, who in aggregate represent a large amount of money focused on a very narrow group of stocks. My advice is to know they are out there and try to stay out of the way when they receive their baptism of fire.

3. Margin debt is at a record (approx. $822 billion vs. total US equity market cap of $49 trillion). Looking at the chart included in the article margin debt seems to go along with the market. It has been on the increase with the market (also making records) for the last ten years. 

4. The American Association of Individual Investors’ average equity allocation is running at 70%.These are not “newbies.” My bet is that if you ask any of the new breed what the AAII is, you would get a blank stare. My sense is with the Fed at 1.6% on the ten-year and whopping stimulus beginning to circulate through the general economy this might be a proper asset allocation even for an “oldie.”

I might point out that articles with headlines such as the one above have been coming out since the birth of this secular bull and to no one’s advantage except their media sources.

Here is an excerpt from one of my posts dated 2/20/2013

This Sunday’s edition of the New York Times carried an article penned by Jeff Sommer, a masterpiece of uncertainty and contradiction, entitled “Jumping Aboard The Train, As If There Won’t Be Another”.  What Mr. Sommer is referring to is his belief that a rush has begun on the part of individual investors to get into the stock market before it does some sort of Moon shot.  If this is the case, it is not a good omen for the market.  Generally speaking, when this type of enthusiasm develops for any asset class the game is over.  And, if this is a stampede into stocks, it is certainly a very strange one.

This cautionary note came eight years ago and 2500 S&P points ago! 

Bottom line: I don’t believe the run is over and you cannot let headlines like this get in the way of you and your investment process. They are meant to sell papers, TV ads and generate clicks, not to enlighten.