5 Signs of Stock Market Euphoria

The legendary investor Jeremy Grantham of GMO recently reviewed the dramatic events he has observed over his 50+-year career managing money. He describes the current bubble as one of the "four most significant and gripping investment events of my life." The others are Japan in 1989, the 2000 tech bubble, and the 2008 housing and mortgage crisis. We are living in historic times.

This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and that's the problem.

Second, last year the S&P was up 18.4%, the Nasdaq 44%, and an equally weighted portfolio of FAAAM -Facebook, Alphabet, Amazon, Apple, Microsoft- plus Netflix was up 55%. The contribution of that latter group to the S&P 500's growth was 14.35%. The "S&P 494" gained only 4.05%.

Third, CitiBank's Panic/Euphoria Model this week dropped to 1.89, still more than 4 times above the Euphoric Line. The last time this Model hit Euphoria was the late 90's with the Dot.Com Boom; but after 3 years of Euphoria the Nasdaq dropped 83% from 2000-2002.

Another sign of Euphoria, the U.S. Stock Market is now worth $42.6 trillion as of last Friday or twice the size of our economy. At the very peak of the Dot.com Bubble the stock market was worth 1.4 times GDP.

Finally, from Peter Boockvar, who noted Call Volume Trading is currently 121% higher than it was in 2018. Peter believes this is a sign that many stock traders believe stocks will continue to rise.

Why do I tell you this? First, when there is a BIG correction or downturn in the stock market we should see bond prices improve and rates drop. Of course, this correction or downturn may be weeks or months away and mortgage rates may be at 3% or higher at that time when rates start to drop because of the stock market correction. Thus, rates in the future may not go any lower than they are today.

Second, if peoples' stock market portfolio's drop big-time they will have less confidence to make BIG purchases like a home. Now this should have very little impact on homes priced less than $750k; but above $1 million home sales could slow dramatically as people lose confidence and money to purchase a million-dollar home. Thus, if you have clients considering selling their million-dollar home I would encourage them to list their home right now as waiting 2 or 3 months may be too late if the stock market is dropping by then and then there will be far fewer buyers.