Last year I asked if we are in a stock market bubble. My answer was no. Much of the basis for that thinking was that sentiment was just too bearish in general. There has been a tremendous amount of skepticism about the economy and the stock market for 5 years running.
How many times have we read articles about how the stock market is only being fueled by the Fed only to later discover that earnings growth has actually been pretty strong? Or how many times have we read about how bad the economy is only to discover months later that it’s gotten a bit better? That’s the fuel that drives a bull market. Irrational apathy.
The bears are always bearish when things are bad and they look at the world so negatively that they don’t consider that that macro weakness in the economy is actually slack that is almost always waiting to be tightened. And as it gets tightened the bears scream about the ongoing weakness and a weak economy turns into an okay economy which turns into a strong economy. It’s at that point in the cycle when you really want to become more skeptical. This is the point when everyone potentially becomes convinced that the market is a one way bet.
So, are we there yet? I don’t know. I am still inclined to argue that this isn’t a bubble. But it is sure starting to feel like it could become one. Practically everyone I talk to is dying to get into the stock market. They’re just waiting to “buy the dip” – the dip that keeps on never coming. And so dip buyers become rally chasers. And that’s the thing of bubbles. When people buy just for the sake of buying something that they believe can never go down. Irrational apathy gives way to irrational exuberance and voilà! Bubble.
Are we there yet? Not quite. I wouldn’t call this rally irrational. But it’s got all the right ingredients to take us there.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.