My friend, you’re focusing on the wrong things…
Yes, I know that stocks have mostly gone up since 2009. That’s seven years. That makes this bull market old. But stock market booms don’t die of old age.
And yes, I know, stocks are getting “up there” in valuation. But high valuations by themselves don’t kill stock market booms.[ad#Google Adsense 336×280-IA]There’s only one thing that kills a stock market boom…
I’m talking about extreme optimism.
Why does this kill a boom?
It’s simple. When everyone who wants to buy has already bought, then nobody is left to buy. (Alan Greenspan famously called this “irrational exuberance.”)
So I ask you… have we reached a point of extreme optimism?
What does this point look like?
To me, it looks like the U.S. real estate market in 2006.
You remember… People thought that house prices could go up 20% a year forever – while incomes were growing at 2% a year.
Think about that math… It’s obvious that at some point, people wouldn’t be able to afford to buy homes. But people became irrationally exuberant about housing and kept buying anyway. It had to end.
So… are people irrationally exuberant about stocks today?
I’ll spare you the suspense: NO.
Fewer Americans hold stocks than at any time in decades, according to the latest numbers from research firm Gallup (covering 19 years of polls).
Does that sound like irrational exuberance? No… It sounds more like pessimism to me!
Incidentally, Gallup reports that the two highest percentages of Americans owning stocks were in 2000 and 2007 – both stock market peaks.
And it isn’t just households that are pessimistic. Professional investors are, too…
Last week, Barron’s magazine published its twice-annual “Big Money” poll. It said, “The current reading is perhaps one of the least bullish in the poll’s more than 20-year history…”
When asked, “Do you expect stocks to rise 10% or more in the next 12 months?” 68% of the respondents in the “Big Money” poll said “no.”
When asked the opposite question, “Do you expect stocks to fall by 10% or more in the next 12 months?” respondents gave the opposite answer – 66% of the “Big Money” respondents said “yes.”
Now, tell me… does this sound like “extreme optimism” to you? Does this sound like “irrational exuberance”? Does this sound like the housing market back in 2006?
No. No. And no.
Asset prices peak when optimism reaches an extreme in that asset. We are nowhere near that point in stocks yet.
Don’t forget it!
Source: Daily Wealth