The late Sir John Templeton said it best when he explained investors’ emotions at major turning points in stock market cycles. He said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
Investor Euphoria So Strong, There’s No Fear!
Below is a chart of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), often referred to as the “fear index.” As you can see from the chart, the fear index sits at one of the lowest levels since 2007, and it has been in a continuous decline since 2009. At the very core, the index is telling us that investors are very optimistic about stock prices and don’t see any risks.
Chart Courtesy of www.StockCharts.com
Next, when I look at the current record stock ownership of households in the U.S., the situation gets downright scary. In the third quarter of 2007—this is when we saw key stock indices form a top that lasted for years—household and non-profit corporations in the U.S. held $10.64 trillion in stocks. In the last quarter of 2014, they held $13.36 trillion in stocks. (Source: Federal Reserve Bank of St. Louis, last accessed May 29, 2015.)
Americans now have 25% more invested in stocks than they did at the previous peak! As you can see from this chart below, Americans have never owned as much stock as they own now. If this doesn’t scream euphoria, then I don’t know what will.
Advisors Anticipate Higher Key Stock Indices Ahead
Sadly, it’s not only the average investor who’s bullish towards equities. Turn on the business channel of your TV or go on the Internet and you’ll hear the so-called “experts” say stocks are bound to go higher.
Not too long ago, Jeremy Siegel, a well-known economist, said, “…I still believe 20,000 is the fair market value of the Dow [Jones Industrial Average] given interest rates and perspective interest rates […] Maybe by the end of the year if things go well…” (Source: CNBC, March 27, 2015.)
The Dow Jones Industrial Average is currently hovering around 18,000. It will have to rise more than 11% by the end of this year to reach Jeremy Siegel’s target. But so far this year, in the first five months of 2015, stocks have gone nowhere.
Where I See the Stock Market Going Next
To me, all of this is nothing new. I have seen this over and over again. It was the same situation during the Tech Bubble. The NASDAQ was reaching 5,000 and investors kept buying, thinking prices would rise further.
In 2007, something similar happened again despite obvious signs of excessiveness left, right, and center. If you listened to stock market “experts” back then, the majority said to keep buying stocks. Investors were loaded up on equities. And then it all came crashing down.
I see current market conditions very similar to those of the Tech Bubble and of late 2007. Investors and mainstream market analysts have completely lost touch with reality. This won’t end well.