Lance Roberts describes the current stock market environment in three words. “This is abnormal.”
Roberts, chief investment officer at RIA Advisors, said in a Feb. 27 memo that bullish investor sentiment has gotten out of hand and the rapid upward momentum puts stocks at risk of entering a bubble. Ta.
The S&P 500 index has continued to rise for the first 16 months of 2024, rising more than 8% since the beginning of the year to a record high. Earnings have been strong, with much of the gain coming from large-cap stocks, especially Nvidia.
But signs of widespread speculation are emerging as well, Roberts said. First, there are 75 stocks in the S&P 1500 across a variety of industries that trade at price-to-sales ratios greater than 10. For context, the average price-to-sales ratio for the S&P 500 is 2.7, which is also considered historically high.
The other is the Investor Sentiment Index. He cited Charles Schwab's Trader Sentiment Survey showing retail investors are much more optimistic than they were a year ago. The fourth quarter survey found that 53% of retail investors were bullish on stocks, compared to 32% in the fourth quarter of 2022.
Other surveys show similar increased vibrancy. CNN's Fear and Greed Index is in the realm of “extreme greed,” the highest possible category. According to the American Association of Individual Investors' sentiment survey, 46.5% of investors are bullish, higher than the long-term average of 37.5%. Meanwhile, only 21.3% of investors classify themselves as bearish, below the long-term average of 31%.
Roberts shared a graph showing the AAII survey's 13-week net average. It shows that investor sentiment is nearing its highest since 2005.
RIA advisor
According to him, there are also technical indicators that reflect high sentiment. This is an indicator that shows whether the S&P 500 is overbought or oversold, and is a composite of multiple technical indicators. It has just reached an all-time high, meaning the momentum could not be stronger.
RIA advisor
The S&P 500 and its short-term moving averages are also starting to outperform their long-term moving averages.
RIA advisor
Finally, market volatility is very low, as shown by the CBOE's volatility index, commonly known as the VIX.
“Volatility compression remains a significant near-term concern. Low levels of volatility have become increasingly common since the financial crisis due to suppressed interest rates and a flood of liquidity, but the lack of volatility It becomes the “fuel” for the economy. It’s a market correction,” Roberts said.
RIA advisor
Roberts warned that while a crash may not be imminent, the longer the market collapses, the more the consequences will be postponed.
“Of course, investing in the market is not a 'risk-free' venture. There are many opportunities to make money, but there is also a history of wealth destruction,” he said. “So understanding the environment you are investing in can help you avoid potential capital destruction.”
How close are stocks to bubble territory?
Opinions differ on how close stock prices are to a bubble.
Ray Dalio, the billionaire founder of Bridgewater Associates, said in a LinkedIn post this week that stocks are not in a bubble, even the megacap Magnificent Seven fueled by excitement around AI. He said it was not a bubble.
This is Dalio's bubble gauge, but current levels are nowhere near the highs of 1929 or 1999.
Ray Dalio
“The Magnificent 7 has driven a significant portion of the rally in U.S. stocks over the past year,” Dalio said. “The market capitalization of the basket has increased over 80% since January 2023, and these companies now account for over 25% of the S&P 500 market capitalization. Mag-7 is measured to be a bit frothy But it's not completely bubbly.'' “
He added: “Valuations are modestly expensive given current and expected earnings, sentiment is bullish but not overly bullish, and we don't see any over-leverage or a rush of new naive buyers. “However, we can still imagine a significant increase.” Correct these names if the generation AI can't live up to the built-in effects. ”
Bank of America's Michael Hartnett said the AI craze is in the early stages of forming a bubble, and that rising 10-year Treasury yields and a sharp rise in the Nasdaq have historically been signs of a bubble. Meanwhile, Société Générale's Albert Edwards noted that for the first time since 2000, at the peak of the dot-com bubble, the information technology sector accounted for one-third of the S&P 500's total market capitalization.
société generale
Legendary investor Jeremy Grantham also recently warned that stocks are in the midst of a catastrophic collapse.
Although major Wall Street banks don't see much room for stock prices to rise, some have already been forced to raise their year-end price targets. Goldman Sachs and JPMorgan expect the S&P 500 to reach 5,200, representing an upside of about 1%. Meanwhile, Morgan Stanley has one of the more bearish targets, at 4,500, representing a 12% downside from current levels of 5,137.
How stocks fare in the coming months will continue to depend on macroeconomic conditions and earnings data. But as Roberts warns, the more excited investors get, the more pain they could experience down the road.
