Death by Euphoria

Avoid places where the crowd is thick, many argue. The mob is always wrong.

But it’s not true.

The crowd can be right the majority of the time…

It’s mostly at the extremes that the crowd is wrong.

Where was the crowd on Oct. 11, 2007… when the S&P peaked at a bubbly 1,576… before the bubble burst?

The question answers itself, no?

Where was that same crowd on March 6, 2009… when the S&P bottomed at a devilish 666… before its current eight-year run?

Exactly — swearing off stocks forever and ever.

Wrong at the extreme, that is. Just like it was wrong at the bullish extreme in 2007.

Countless examples abound.

Only at the extremes does the glorious folly of crowds reveal itself.

But who can identify the extremes?

It only seems obvious in hindsight.

With markets trading around record highs once again… has the crowd now swung back toward the euphoric extreme?


Bank of America Merrill Lynch (BofA) now argues that investors have taken “the first step toward market euphoria.”

BofA runs something called the “Sell Side Indicator,” its barometer of stock market optimism. The bank calls it a “reliable contrary indicator.”

“In other words,” that is, “it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa.”

Now it shows investors are turning bullish again…

The bank’s barometer of stock market optimism rose last month to its highest level since August 2015 — just before a flash crash knocked 1,000 points off the Dow, incidentally.

BofA analyst Savita Subramanian:

The recent inflection from skepticism to optimism could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle.

And judging by today’s stock market valuations, investors have rarely been so bullish.

By some measures, stocks have only been this expensive twice in the past 140 years, as MarketWatch notes.

In 1929… and 2000.

On the significance of these dates, we append no comment.

Yet earnings per share of the S&P 500 have been virtually flat for the past three years… even though prices have risen some 30%.

It calls to mind a bidding war on a racehorse that hasn’t placed in three years.

And as reported in MarketWatch, investor surveys conducted by Yale economist Robert Shiller reveal more than 90% of investors expect prices to rise another year.

That number approaches 100% among institutional investors.

This is the very definition of Alan Greenspan’s famous “irrational exuberance,” according to analysts at Bespoke Investment Group.

But this irrational exuberance has levitated the stock market “one final time to a level that’s now at least 50% overvalued in general (S&P 500 should be 1,600 or lower),” explains David Stockman.

David further argues some market sectors are overvalued 70–90%.

Pretty handsome.

All this as annualized first-quarter GDP growth weighed in Friday at a rationally in-exuberant 0.7%.

That’s quite a drop from the previous quarter’s 2.1% — and the lowest rate since the first quarter of 2014.

Meanwhile, the vaunted Trump stimulus — tax cuts, infrastructure, mass deregulation — are just gossip among the Baltimore orioles outside our window.

Who know if any of it comes to pass?

No matter, says Mr. Market — for now at least.

It was Sir John Templeton who said bull markets are born on pessimism, grow on skepticism, mature on optimism… and die on euphoria.

This current bull was certainly born on pessimism. It grew on skepticism and matured on optimism…

The only remaining question: Will it soon die on euphoria?


Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning