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Is the Market Too High Right Now?

by Ashby Daniels, CFP®

*This chart is for illustrative purposes only.

A common theme in news articles I have been reading is the idea that the market is in a euphoric period. There is certainly some euphoria around newly minted Robinhood traders and investors of Tesla and Bitcoin, but is the main street investor euphoric? I’m not so sure.

I don’t know about you, but the other investors I am talking to are feeling far from euphoric. They seem to be operating with reserved optimism, if not skepticism at current market values. The thinking is along the lines of “I’m not sure how the market keeps going up, but I’m glad I’ve stayed invested. Should we take some chips off the table?” That doesn’t sound euphoric to me.

So, while there is certainly some unrestrained optimism out there, I don’t think it’s spreading to the typical main street investor.

Euphoria is typically derived from the survey, US Investor Sentiment, as the chart below shows.

At current, that figure is at 54%.

YCharts offers the following explanation for the chart:

US Investor Sentiment, % Bullish is an indicator that is a part of the AAII Sentiment Survey. It indicates the percentage of investors surveyed that had a bullish outlook on the market. An investor that is bullish, will primarily think that the market will head higher in the next six months. One of the highs of the bullish survey was in 2000 during the technology boom. This sentiment indicator reached 75% during that time frame.

US Investor Sentiment, % Bullish is at 54.03%, compared to 46.08% last week and 37.22% last year. This is higher than the long term average of 37.95%.

Over the last 10 years, there have been three times when “investor sentiment” exceeded where we are today. Those three times were the end of 2013, the end of 2014, and the end of 2017. Here they are with the subsequent year’s performance:

  • End-of-year 2013 Investor Sentiment: 55%
  • 2014 Market Performance: 13.69%
  • EOY 2014 Investor Sentiment: 58%
  • 2015 Market Performance: 1.38%
  • EOY 2017 Investor Sentiment: 60%
  • 2018 Market Performance: -4.38%

What should you make of this information? Absolutely nothing. As we’ve discussed ad nauseam here, people are terrible predictors of what will happen next.

For the curious at heart, let’s take a look at the annual compounding rate of return with dividends reinvested since these “euphoria” measurements were registered:

Since EOY 2013: 13% per year!
Since EOY 2014: 12.5% per year!
Since EOY 2017: Almost 14% per year!

Hindsight being what it is, none of these times seem like it would have been a good time to get conservative based on this or any other measurement of risk, does it? I’m not saying it’s going to keep going like this, I’m just saying we should be skeptical about using these types of measurements to make portfolio decisions.

It is also worth noting that where we are today is quite different from those three prior occurrences as interest rates are in the tank by comparison.

Given that fact, I can’t help but wonder if this isn’t euphoria, but a lack of other viable options for income and growth at this point. The bond market will continue to look like death for as far out as I can see given that, at some point, interest rates will come off their perpetual floor. What else is an investor to do if they want income or growth, much less both? Both pretty much only exist in equities at the moment.

Last thing. I want to spend one minute on the graphic at the top. Before we come to the conclusion that “The market is too high.” right now, I want to offer a gentle reminder: It probably won’t matter if you are a long-term investor.

Given a long enough time frame, the market isn’t too high right now, it’s just on its way to somewhere higher…eventually. Who knows what comes next, but I will maintain my faith in the future.

As always, stay the course.

-Ashby


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This post is not advice. Please see additional disclaimers.

Filed Under: Investing

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