The Market’s at New Highs, So What May Go Wrong?
The bulls are screaming, and during the past week we’ve seen the S&P 500 Index surge to its highest point in more than five years. In fact, the last time the broad measure of the domestic equity market was at this elevated level was back in 2008. Of course, we all know what a great year that was for stocks, don’t we?
I am being tongue in cheek here, of course, as 2008 actually was one of the worst years ever for equities. Now, I am not saying that 2013 will be a repeat of 2008. But in 2008, as is the case today, investors were largely of the opinion that nothing possibly could go wrong, and that stocks were headed up, up, up.
I remember that time as a period of high complacency, and one characterized by blind optimism about the markets, the global economy, the housing market, etc. The result of this optimism was that investors failed to protect themselves from a pernicious fall in stocks. Moreover, many investors were way too allocated to momentum stocks. Because of that, many investors have yet to begin to get back to where they were in 2008.
Unfortunately, the same sentiment back in 2008 is out there today.
According to a recent Bloomberg survey, investors are the most bullish on stocks in at least 3 1/2 years, with close to two-thirds planning to raise their holdings of equities during the next six months.
The Bloomberg Global Poll also showed that 53% of respondents say equities will offer the highest return in the next year. That figure represents a 17 percentage point jump from the last poll in November. It’s also the highest metric since Bloomberg began the quarterly survey of investors, analysts and traders in July 2009.
So, what’s behind all of the enthusiasm for stocks? The survey cites growing confidence in the U.S. economy and a reduction in concern over Europe’s ailing financial situation. According to respondents, America is in its best shape it’s been in for two years, and Europe has essentially righted its 2012 tailspin.
All of this optimism translates into a serious case of complacence, and one that I fear really could hurt those who are not prepared to cope with a market downturn.
It is during times when investors harbor unbridled bullish enthusiasm that, seemingly out of nowhere, an exogenous event pops up to slap investors back into recognizing the error of their ways.
So, what kind of exogenous events can take this market down?
Certainly there are the political machinations in Washington about spending cuts, and particularly over the debt ceiling. Earlier today, the House of Representatives voted to extend the debt-ceiling limit for three months, provided the Senate passes a budget. We’ll see what happens here. But to me, this situation seems like more of the same “kicking the can down the road” that has led us to so many uncomfortable, and market damaging, political battles.
Then there’s the unknown still lurking over Europe, and that region’s troublesome bailout issues. If we get more tumult in that region in the months ahead, it could very well be another flight-to-safety event in the market similar to what we saw in mid-year 2012.
For now, however, the market continues to trade with blinders on, and that situation means stocks keep getting bid up — until they don’t.