A recent article in The New York Times, “Fund Investors Basking Under Many Clouds,” considers what seems to be complacency on the part of “investors who have displayed a growing appetite for risk and a striking lack of concern about any reversal of fortune.”
The article also refers to the fact that, in the most recent Investors Intelligence survey of advisory newsletters, it was found that there are nearly four bullish investors for every one bearish investor. It bears noting that the view of Investors Intelligence is that investor sentiments tend be predictive but in a contrarian sort of way. In other words, a high percentage of bulls are more commonly found near a market peak, while bears tend to more numerous near a market low.
After establishing that investors are mostly bullish, the article goes on to list the “clouds” under which investors are “basking”:
- Tensions remaining high in Ukraine
- Attacks in June by the Islamic State in Iraq and Syria (ISIS)
- Recent flare up between Israel and its Palestinian adversaries
- Gross Domestic Product contracting at a 2.9% annual rate in the first quarter
Even through investors appear to be shrugging off the geopolitical events and the slow growth of the US GDP, it would seem that current market valuations should be of even greater concern.
Consider the statement from the Times article by Gerald Buetow, Chief Investment Officer at Innealta Capital:
"Where’s the organic growth? You can only squeeze so much water out of this rock. Look at the figures that folks are using to defend equity valuations. They’re using unsustainable profit and growth assumptions. The market is frighteningly, dangerously overvalued."
Then there is the somewhat ominous final ending paragraph which quotes BlackRock Chief Investment Strategist, Russ Koesterich:
"You have to be realistic; very few things are cheap on an absolute basis … investors have been conditioned by every scare they read about in the paper to buy the dip because the conditions go away … one day they won’t."
If one wants to take a look at one of the most bearish forecasts, consider a Forbes.com post written this month by economic analyst, Jesse Colombo. In the article, entitled, “These 23 Charts Prove That Stocks Are Heading For A Devastating Crash,” the author takes this position:
"Stock market bulls are becoming increasingly brazen as they drive the market to nosebleed heights, which is convincing a greater number of people into believing in the economic recovery. Unfortunately, the public is being fooled because the U.S. stock market and economy is experiencing another classic central bank-driven bubble that will end in a calamity, erasing trillions of dollars of wealth."
Conclusion
As is often said, it is very difficult to call either a market top or bottom. However, one does not need to be a rocket scientist to understand that, once valuations and the value of stocks (on an absolute basis) become increasingly divergent, it is only a matter of time before the market corrects itself. Why? Because this is what markets do. So, it is best to heed the gathering clouds and be ready for the next downturn as opposed to “whistling past the graveyard.”
