Mom and pop investors bought lots of stocks last year as the key stock indices reached all-time highs. By late 2013, the fear of “missing out” on future stock market gains was back. Sound similar to 2007?
According to the Investment Company Institute, investors bought $160.9 billion worth of stock mutual funds in 2013. This was the first time since 2007 when these types of mutual funds saw inflows. In 2007, investors bought $73.9 billion worth of long-term stock mutual funds. (Source: Investment Company Institute web site, last accessed February 11, 2014.)
And stock advisors are outright optimistic. For example, Birinyi Associates Inc.’s Laszlo Birinyi, a well-known money manager, is saying that the S&P 500 will hit 1,900 by the next quarter (it’s at 1,820 now). His argument: don’t bet against stocks because they have too much momentum. (Source: BusinessWeek, February 10, 2014.) Back in 2007, we heard many bullish calls for higher stock prices; we heard calls from well-known stock advisors saying key stock indices like the Dow Jones Industrial Average would hit 20,000 (seven years later, it’s stuck at 16,000).
One way I gauge optimism and complacency in the marketplace is by accessing auto sales. Car sales in the U.S. economy have reached 2007 levels again, and there are predictions that they will grow even further. After almost going bankrupt, the automakers are making all kinds of money again, paying their people very well once more. The new CEO of General Motors Company (NYSE/GM) will be paid $14.4 million in 2014, 60% more than what the previous CEO of the company made. (Source: Reuters, February 10, 2014.) GM went bankrupt and was bailed out by the government, but it looks like all is forgotten again.
In December of 2013, as the key stock indices reached their highest levels, margin debt on the New York Stock Exchange (NYSE) reached its all-time high, as well. It stood at $444.9 billion. Back in July 2007, when key stock indices were also reaching all-time highs, margin debt reached $381 billion. (Source: New York Stock Exchange web site, last accessed February 11, 2014.) Margin debt—the amount of money people are borrowing to buy stocks—is higher today than it was in 2007…and we know what happened to key stock indices after 2007.
Back to auto sales for a moment: in the same way investors are financing stock purchases at a record level, people are buying cars with a record amount of borrowed money.
Auto sales in the U.S. economy have been soaring on the backs of subprime borrowers—cars are being sold to those who have low credit scores. A couple of weeks ago, the chief economist at Moody’s Analytics, Mark Zandi, said, “Subprime auto lending is almost back to its prerecession levels.” (Source: “Shop for car loans before heading to showroom,” USA Today, January 18, 2014.)
Need I say more?
In 2007, the situation was very similar. People were buying stocks and cars (with borrowed money) as if there was no tomorrow. Imagine telling someone in 2007, when the Dow Jones hit a record 14,000, that stocks would collapse? I did. But only very few would listen. In fact, they laughed at me in 2007 when I was preaching about a crash headed our way. Eventually, we saw a massive decline on the key stock indices as the bubble burst.
Dear reader, stock market buying opportunities are not formed when optimism is high like it is today and when investors and consumers are so financially extended like they are today. The market and economic fundamentals are stressed right now. Be careful.