Main Street gets bullish
Stock-based mutual funds have sucked up more cash in 2013 than any year since 2004 — $76 billion, to be exact, vs. total outflows of $451 billion from 2006 to 2012.
If you want to be a fatalist, the fact that the “dumb money” is returning to the market is the ultimate sign of a top. Alexandra Scaggs of the Wall Street Journal tracks down a group of inspiring mom-and-pop investors, who offer quotes like “I still think there’s huge upside in the stock market … I don’t want to miss out.”
Sure, the return of retail investors could provide greater buying pressure to the market and push indexes to even more record highs in 2014. But once people start buying stocks simply because stocks are going up, that sounds to me like the very definition of a bubble.
Empty highs
The Dow Jones set its 37th record high on Thursday — and as usual, financial media was happy to alert investors of that fact.
But it’s worth noting that eclipses the 34 record highs set in the year of 2007, right before the bottom fell out.
Record highs alone are not sign of a top, of course. After all, in 1995, the market set 69 new highs — a record amount of record highs, if you will — and continued chugging along until the dot-com crash.
But the highs of 2013 feel different insofar that they are given big significance as an “all clear” of sorts. Consider that in 1995, the unemployment rate was in the mid-5% range compared with a peak over 8.2% in 1992. Also consider that there wasn’t a single year in the 1990s with a GDP growth rate of less than 4%. A bull market in stocks was great, but also part of a broader narrative of economic might in the decade.
That’s wasn’t the case in 2007 as cracks in the growth story started to emerge. And that certainly isn’t the case now as persistently high unemployment and anemic growth are the rule.
Hysteria in general
While it’s hard to parse legitimate bullishness from naïve optimism, it’s important to understand the value of skepticism amid big rallies to keep investors honest.
We lack a lot of that skepticism now. Consider the weekly sentiment survey from the American Association of Individual Investors recently showed the biggest spread between bulls and bears since April 2011 — a few months before a roughly 18% correction in the market.
Also consider that high short interest is now considered simply an opportunity for a squeeze and not a reflection of legitimate concern. Bears betting against GamestopGME -2.64% ? Definitely not because a brick-and-mortar retailer of physical video games faces huge threats in a digital age … regular 52-week highs, here we come!
As the old saying goes, be greedy when investors are fearful and very fearful when others are greedy.
Multiples are insane
I won’t trot out the obvious targets here in tech that trade for 100 times forward earnings because those are easy targets.
Rather, I’d point to the higher relative premiums across the board — particularly for the sleepy stocks that do not typically trade for big multiples to actual profits.
Consider that traditionally defensive stocks are now trading for much higher price-to-earnings multiples than they have historically. As I wrote in a recent column, consider that in 1997, the P/E of defensive sectors characterized by dividend payers was sometimes as much as 40% below the relative P/E of the broader market, but in 2013, defensive dividend payers are trading for a 20% premium thanks to a frenzy of buyers bidding them up.
Yes, a lack of interest-bearing assets means a push into stable dividend stocks makes sense. But do you think a slow-growth play like Colgate-Palmolive CL +0.17% should really trade at 22 times forward earnings forever?
IPO craze
The flurry of stock and bond issuance is perhaps the biggest danger sign of all. While it’s all well and good for start-ups to tap the markets for capital, don’t think for a moment it’s only about entrepreneurship.
It’s also about getting paid before the music stops.
So far this year, there has been $51 billion raised in U.S. stock IPOs according to Dealogic. That’s the biggest tally since – you guessed it – the dot-com era, where $63 billion was raised in 2000 right before the tech bubble burst.
It’s all well and good for entrepreneurs to access funds in an effort to grow their business. And maybe it’s just coincidence that fashionable companies like Twitter and 3D printer like Voxeljet are racing to Wall Street at the same time in 2013.
But color me skeptical. I think there’s a better chance that management – and more importantly, VC backers – know that this is the best chance these companies have to raise the most money on the open market.
And just like buying stocks because you expect them to go higher is the sign of a bubble, IPOs rushing to market just because it’s a good IPO market is also a serious sign that markets aren’t acting rationally anymore.
