A Critical Stage: Market Exhuberance?

Focus: STOCKS

James Stack Image James Stack President, Stack Financial Management

This is, indeed, a mature economic cycle and potentially the latter stages of the second longest bull market in Wall Street history. By most measures, both consumer and business confidence are at the highest levels in over 12 years, explains Jim Stack, money manager and editor of InvesTech Research.

The confidence on Main Street has turned into exuberance and speculation on Wall Street, as valuations move to more dangerous levels and margin debt soars upward toward all-time highs. Meanwhile, history suggests this market is overdue for a correction.

History shows that 10% corrections come around about every two years (25.9 months), and 5% corrections occur more regularly — every 7.1 months.

It has now been 14.2 months since the most recent correction ended in February of last year. So while recession warning flags appear to be resiliently (and surprisingly) absent, one might say this bull market is getting a bit overdue for the next 5% to 10% correction.

While confidence and optimism provide the fuel for economic growth and a strong stock market, this same fuel can push valuations and speculation to excessive levels, and often leads to market tops.

One of the most revealing examples of investors’ increased appetite for risk lies in the “FANG” stocks. This narrow group of technology and consumer stocks — Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL) – are considered the leaders in some of the emergent areas of growth in the economy.

Because of their anticipated future potential, these stocks as a group have radically outperformed the S&P 500 since 2015.

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The problem lies in the valuation of the stocks, which appears to already be discounting much of the future growth.