Clearly the market is disconnected from the real economy. Economic metrics are “going straight South” while the market continues to lift off.
While I don’t know for sure what is driving the market to record heights, many sophisticated and long-term market participants are of the opinion that it doesn’t make sense and are standing pat. Interestingly, I hear from many people who never invested in their lives how they are pursuing the “sure” gain by buying stocks. What?!
One guy I know thought he could double his money in less than a month. For me, that is a red flag. Time-tested veterans of the stock market know that the easy money perception is nothing but a mirage. A lot of work goes into managing a successful portfolio. If it was easy, everyone would be doing it successfully.
When people start coming out of the woodwork to invest, it is a bad sign. I think what has driven this “casino” style market is the most recent downturn and the downturn in Dec 2018. In both of these downturns, the market came back in short order, so people think, “I’ll buy the dip and achieve a handsome gain quickly.” As Lee Corso often says on ESPN, “Not so fast!”
The two recent downturns have emboldened market participants. I’ve always found that the best time to be cautious is when most are very confident of their future success. And when many are fearful, like the downslope of the recent plunge, it pays to know good value and have the confidence to act.
A study of the market’s history shows that the market can and does drop and stays down for a long time. A long time could be a year or ten years. When equity owners’ holding periods get long, participants start dropping off like flies, taking losses and vowing to never “invest” again.
Eventually, I believe the most recent downturn will prove to have been a great buying opportunity. But not long after the late March lows, any “discounts” were already squeezed out of the market.
Buying at too high a price and at the wrong time are two financially fatal errors. So when “red” flags get raised, make sure to keep your head low and assure you are well protected in your activities.
Be smart, be well-read and be successful.
