July 10, 2017
We’re at market highs, yet like others, I’m reminded of Queen’s big hit, “Bohemian Rhapsody,” because it’s as if nothing really matters.
I say that because several events of historical magnitude have failed to make any significant impact on the markets.
One is the Trump presidency and the obvious lack of momentum for its agenda. Another is the series of disappointing economic data, unemployment numbers included. There’s also been a 15-month low in Citi’s Economic Surprise Index.
And of course, we have had the London attacks and unrest in the Arab world with several countries cutting ties with Qatar. Stocks did not retreat. In fact, they reached all-time highs!
Want to know what doesn’t seem to matter to the stock market? Lower trading volumes, a negatively trending U.S. dollar, low interest rates and declining oil prices. Believe me, this list is not exhaustive.
The market’s failing to react to these events is perhaps a sign of the times. The prevalence of passive index investing, with its focus on price momentum, means that business fundamentals and events like those described above simply don’t matter to a stock’s price.
In other words, risk is being significantly underpriced. And when investors realize that through big market drops, perhaps then some of these issues will be of importance once again.
Only twice in history have stocks been more overpriced than they are right now – right before the Great Depression and just before the “dot com” bubble of 1999.
A final point – an analyst recently described stocks as somewhere between “tremendously and enormously” overpriced. So, a good option may be to have some cash on hand when the market adjusts. There will be deals to be had.