INCLINE VILLAGE, Nev. — John Templeton said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” With market averages approaching a five-year high, it feels like we are transitioning from skepticism to optimism.
When most investors are too bearish or too bullish a move against them is all but assured. For too long investors have been assuming that the problems we all know about have to lead to crises, if not catastrophes, even though avoiding them is in everyone’s interest. In this column I’ve been saying, “Not so fast.” I still say it. People who invest (or go short) as if a crisis is inevitable are taking a big chance. Same for all those who have been selling stocks and buying Treasuries, paying more and more for less and less while the market they left continues higher. Here are some of the reasons stocks are rising (these will sound familiar):
The news from Europe continues to be, if not positive, at least less dire than it had appeared months ago. The market rallied last week when the ECB announced its plan for bond purchases without limit and again last week when a German court okayed the country’s participation. Collapse of the Eurozone is off the table ... at least for now.
While I have no way to measure it, I can’t help but feel that underinvested hedge funds and money managers are putting cash to work, and those who have been short are folding amid the ongoing pain of a bull market. Just my feeling.
Earnings are growing, corporate balance sheets have never been stronger, and valuations are low compared to interest rates and historical levels. That was true when stocks were lower, it’s still true because prices and earnings have been growing at the same pace. So even though stocks have more than doubled, they are not overvalued.
Alternative investments are unattractive. They have been for a few years, they are now, and they will be for the foreseeable future. I’ve been making that point again and again. People will buy stocks, especially those with good dividends. They’ll have little choice.
As of last week we can add QE3 to the list. The Fed’s balance sheet has grown from $800 billion to $3 trillion since 2008 and now will grow by $40 billion a month for years. In short, the Fed is flooding the financial system and economy with money as it buys mortgages and bonds, hoping some good will come of it. One good effect is obvious -- stocks are rising. Let’s enjoy it. Someday the Fed will be selling.
— David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.