Tahoe Market Pulse: Where’s the euphoria?
John Templeton said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” Where are we now?
Retail investors are far from euphoric. In fact, they have been selling stocks for more than a year. Some professionals have been selling, too. Mutual fund cash is at a level (5.8 percent) not seen since November, 2001, which you may recall was a great time to put cash to work.
Funds must always hold some cash to meet redemptions by retail investors and those have been rising. But I suspect that professionals are accumulating cash mostly because they are not particularly bullish on the economy, GDP growth and profits.
If people are selling stocks, then why do the averages continue to reach new highs? Retail investors might be raising cash, but foreigners and some institutions have picked up the slack … and then some.
Corporate buybacks and mergers/acquisitions have reduced the amount of stock outstanding. Perhaps most important is that pension and endowment funds cannot generate returns to meet their stated goals (or statistical needs) with credit instruments and bonds. Rates are much too low.
That is especially a problem for insurance companies, including those that issue annuities that guarantee a return greater than the insurer can generate by investing premiums. If they are to reach their goals, stocks, high-yield bonds and hedge funds must play a role, and money has been flowing into those sectors.
Successful investors anticipate future earnings, which by definition means that to outperform the market they must see what others do not. It’s hard to make a case for stocks unless the earnings picture improves.
It seems far more likely that growth will accelerate than deteriorate after ten years of sub-par numbers here and far worse overseas. Investors have that likelihood on their side as well as the concerted efforts of central banks to boost growth.
Going back to John Templeton’s quote, the bull market began over seven years ago during the extreme pessimism of the financial crisis.
Stocks have since tripled but investors are far from euphoric. Remember technology stocks in 2000 and real estate in 2008? That was euphoria. We don’t see that today. It is still a bull market.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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