If you are a stock market investor, you’ve probably come to the same realization I have: the stock market is behaving irrationally. These days, the fundamentals don’t really matter. What’s even more frustrating is that when you do talk about the fundamentals behind the market’s continued advance missing, you are ridiculed.
Soft revenues at public companies are just one area of concern. As of October 25, 244 companies on the S&P 500 have reported their third-quarter corporate earnings; only 52% of them registered revenues above the expectation, which means companies are selling less than they expected—not a good sign. Third-quarter corporate earnings growth is now expected to be just 2.3%. A month ago, the same number stood at an even three percent. (Source: FactSet, October 25, 2013.)
We are seeing some of the well-known bears of the stock market turning bullish. “Dr. Doom” is suggesting investing in stocks, and others like David Rosenberg, who has been bearish for years, are turning bullish.
Is this the peak optimism?
As it stands, investors believe the stock market is a safe place to be again. The charts of key stock indices only show an upward trajectory.
Chart courtesy of www.StockCharts.com
What will happen once the euphoria comes crashing down again? After all, irrationality cannot go on forever.
The most recent and best example of a stock market crash we have is from the financial crisis of 2008. We saw key stock indices come down like a rock. That stock market crash wiped out consumer confidence. Those who were retiring and saving each dollar for their golden days (by investing in stocks) saw their retirement dreams disappear.
But it wasn’t just consumers and retirees who got hit hard by the stock market crash of 2008; it also created problems with corporate America as business confidence also plummeted, thus the Great Recession.
I understand I am one of the last standing financial gurus who remain skeptical on the stock market. I am not saying we have reached a top, as it’s very hard to predict when irrationality is exuberant, but we are heading there. There are so many fundamental factors working against the 2013 stock market rise—and they are all being put aside in favor of market exuberance over a Federal Reserve that prints billions of new U.S. dollars each passing month. I feel the best investment strategy is to be cautious and to focus on capital preservation.