In my last Economy & Markets article, I discussed how investors are making potentially dangerous assumptions about policies that may or may not have an impact on the economy and the stock market. For example, we already spend hundreds of billions of dollars on infrastructure. At best, Trump’s plan is incremental and not transformational.
This week I’m going to take a look at the impact this has had on investor sentiment. It’s no secret that the market has taken off like a rocket ship since the election. The move in small cap stocks in particular has been the strongest in nearly three decades.
But, now that the move has happened, is the market ahead of itself?
When looking at both individual investors and investment professionals, the change in market sentiment has been drastic.
Investor have poured over $97.6 billion into exchange-traded funds since the election. This is a record amount of inflows. For comparison, the inflows for all of 2015 was $61.5 billion.
The recent rush to buy into the market and the magnitude of the inflows serve as a contrary indicator. What I mean is: don’t get ahead of yourself.
When the great bull market of 1982 started, there was persistent buying of equities. Baby boomers were in their peak earnings years. They had bonuses, stock options, 401(k)s, and defined-benefit plans. But that demographic trend is now over.
I’m highly skeptical that the recent pouring into stock funds is anything more than speculation.
Again, it goes back to those policies people seem to be so misguided about. The rude awakening may occur around the 100th day of the new administration, when the realization sets in that Washington, DC, is not a business but rather a bureaucracy.
It’s tough to get things done in a bureaucracy. There is no magic wand or all-powerful CEO to change directions on a whim.
As my elementary school teacher used to say: “three trees make a row.” So, the buying that has occurred over the past five or six weeks will need to go on for much longer before we can consider it a full-on trend in this bull market.
Since everyone is virtually maxed out on stocks right now, this is all but impossible to sustain.
Individual investors now have their highest allocation to stocks all year at 66.4% (based on the American Association of Individual Investors’ survey). To raise the capital to buy stocks, individuals have used up cash and dumped bonds.
Historically, individual investors are horrible asset allocators. Their largest equity position ever was just before the Internet Bubble popped and the highest cash position was at the market lows in March 2009. The recent fervor to own equities should be met with caution.
Then you have the professionals.
Just prior to the election, professional investors were allocating about 58% to stocks. Professionals are now almost fully invested with a 96% allocation to stocks. Anything above 73% has been met with meager returns over the past few decades. In fact, the annualized return is approximately 0.25%. After many years, you finally can earn higher interest in your bank account than taking that sort of market risk!
So, the question is: who is left to buy?
The answer is “pretty much no one.”
Take that as your cue to act as a contrarian and reduce risk or tighten your stops on your big market wins over the last six weeks.
And you should know that there’s a pretty incredible option for you right now to join our most elite level of investing acumen and profitability. Do yourself a favor and check out The Network right here.
John Del Vecchio
Editor of Forensic Investor