You’ve probably heard the old saying that bull markets die in euphoria. Many investors begin to wonder whether we’ve reached a euphoric state when the market continues to make all-time highs…like now. In 2019, the S&P 500 has already recorded more than 20 new all-time highs and today we’re trading just under the most recent all-time high of 3,154 (the S&P 500 is at 3,145 as I write).
Is this euphoria? For a number of reasons, I think not. First, investors who are feeling euphoric don’t ask this question. Signs of investor euphoria might consist of people actively chasing market returns, engaging in market conversations with Uber drivers, wait staff or bank tellers, or feelings you must do something so as not to miss out on these great returns. The fact that many people are uncomfortable with all-time highs and ask questions that often refer back to the 2008/09 financial crisis, suggest that investors are not euphoric.
Beyond this investor psychology, another indicator also suggests the market is producing all-time highs without achieving a euphoric state. Take a look at this chart. It shows fund flows into stock mutual funds and ETFs from 1992 through 2019. What do you notice?
Right. In 2019, investors are pulling money out of stock funds and at a pace much greater than 2008 or 2009. Is this what you would expect from investors chasing market returns as a result of FOMO (the fear of missing out)? No. A euphoric response would be just the opposite – with investors actively adding to funds with market exposure.
You might ask – if investors are pulling money out of stock funds, why is the marketing hitting all-time highs? One reason is stock buybacks. The on-going trade war has resulted in many corporations holding off on new capital expenditures (new factories, new R&D and the like) waiting for more clarity on the issue. But trade tensions have not dampened corporate enthusiasm for share repurchases. In 2018, S&P 500 companies announced almost $1T (yes trillion) of share buybacks and another $600B + of share repurchases in 2019. Fewer outstanding shares increases earnings per share (more profit per share of stock) and can lead to increased dividends (a set amount of profit allocated to dividends divided by fewer shares of stock). In short, stock buybacks are great for shareholders – they are great for you!
Hopefully, these data can assuage concerns you may have about where the market is right now. Couple that with the knowledge that we are always on the lookout for indicators that suggest we need to make meaningful changes in your portfolios. Right now, we don’t see such.
With that, we wish you all the best for a peaceful, joy-filled holiday season with family and friends. If you have questions or would like to chat, please let me know.
