Euphoria Isn’t Rampant
The catalyst for all the bubble talk in November might have been all the talk about retail investors — the ma-and-pa type of people who live next door — finally pouring into the market, not wanting to miss out on any more of the stock market’s apparent easy gains. Since this is the proverbial “dumb money,” the fact that these little guys want in indicates that it’s time for the smart money to get out, which would incite an avalanche of selling pressure on stocks.
But there’s one problem with the notion that Joe Schmo is pouring his life savings into the stock market: It’s just not true.
Oh, there are anecdotal pieces of data that could indirectly imply that small investors are wading back into the market. Most of it centers on stock mutual fund inflows, which admittedly have been strong this year. As of the end of October, a record $231 billion had been poured into the stock market via mutual funds this year.
It’s a bit of a dubious honor, however, as much of that “new” money was merely redirected from the bond market’s normal flow of cash into its mutual funds. Last year, bond funds collected $265 billion of investors’ money. This year so far, with low interest rates that aren’t going to improve anytime soon, the total bond-fund inflow is only $16 billion.
Point being, equity funds might only be collecting record-breaking assets because there’s nothing else more fruitful to do with that money.
Be that as it may, while mutual fund inflows are enormous, 2013 is on pace to be the lowest-trading-volume year in the past seven. That time span covers the rise of the real estate bubble, the subprime mortgage meltdown and the subsequent recovery in the meantime.
Bubbles are formed when a crowd gets so large it becomes unwieldy. The trader/investor crowd — according to volume activity anyway — still is shrinking from its 2009 peak.
Sure, we might be due for a decent correction, and we might even be en route to a bubble. But we’re not there yet, and it could be a while until we get there, so we might as well enjoy the ride while it lasts.
Just be sure to bail out before the bubble actually pops.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.