By James Saft
NEW YORK, May 8 (Reuters) – This is not your parents’ bull
market.
In fact, your dad and mom very may well have abandoned the
market entirely. That could be the single best indicator that
stocks have room to run.
The Dow Jones industrial average closed above 15,000 for the
first time on Tuesday, the same day the S&P; 500 made its
all-time high for the fourth consecutive trading
session.
You can argue all you like about how corporate profits are
vulnerable and the market is hung from the clouds on slender
threads spun by Ben Bernanke, but what you can’t say is that we
are in classic broad-based stock market mania.
Two facts:
1 – Only 52 percent of Americans own stocks, according to
polling from Gallup published on Wednesday. That’s the lowest
since they started asking the question in 1998.
2 – Only 31 percent of small investors describe themselves
as bullish, well below historical norms, and nearly 36 percent
are bears, well above historic averages, according to an
American Association of Individual Investors survey released on
May 2.
The demographics underpinning these facts may argue for
caution, but they do not suggest that we are poised for a
correction (absent, of course, some external shock). Instead,
these studies suggest there are still some people out there who
might, if things stay calm and stocks keep going up, have the
money to give the market more gas.
Yes, the stock market rally is in large part the creation of
extraordinary central bank policy, and yes, that is a narrow
ledge upon which to build a solid foundation.
And indeed, mom and dad may well not own stocks because they
are a good bit less well off than they were five or 10 years
ago, which in itself does not argue for a sustainably vibrant
economy.
Still, if you subscribe to the “manias and crashes” school
of financial markets, the single best indicator of an end-stage
bubble is that everyone is doing it and, even worse, won’t shut
up about it.
We are not there. You probably don’t have a shoe-shine boy,
but if you do he definitely isn’t trying to talk you into shale
oil plays. Neither is your dentist, though he might well be
clubbing together with friends to buy rental properties. And if
you tell your cab driver you do something having to do with
finance, he is more likely to complain about the iniquities of
the investment system than crow about how it is making him rich.
All of this should give those of us with bearish, or as I
prefer, skeptical, tendencies, some comfort.
STOCKS, JOBS AND HISTORY
The AAII survey of small investors has been running since
1987, taking in several of the booms and busts of modern
Greenspan-style central banking. The survey is simple and asks
investors to describe themselves as bullish, neutral or bearish.
One of the most striking things about the data is how often
extremes line up with market tops and bottoms.
The highest-ever bullish figure was 75 percent, near the
peak of the dot com bubble, while the lowest-ever such figure
was 6 percent in 1990, when Iraq controlled Kuwait and the first
Gulf War was in preparation. Similarly, bearish sentiment hit
its all time low at 6 percent in the summer before the crash of
1987.
In the same vein, the Gallup poll showed an all-time high of
stock market participation at 65 percent in 2007, and it has
been falling ever since, even as the unemployment rate partly
recovered.
Now, it may be that small investors have learned the lessons
of the bubblicious last three decades and have simply decided to
sit this one out, but that is an argument that rests on the hope
that human nature has changed. My guess would be that as people
get their 401(k), brokerage and mutual fund reports in coming
months, they will like what they see and it will fill many with
a painful mix of greed and regret. That kind of thing is the
true building block of a mania, and that we have yet to see.
So whose money has been driving the rally? Partly it is
professional money managers, whose performance is benchmarked
against the market and who will thus have been conditioned by
the strong recovery in stocks since the crash to be in the
market or to look bad. It also has partly been driven by
institutions like pension funds and endowments taking on risks,
reinvesting the money handed to them by central bank bond buying
in something with more yield and upside.
The one common denominator is that all of these
professionals know that authorities have effectively
underwritten the market.
So yes, you can say this is a cynical rally. Cynical yes,
but not crazy, at least not yet. That stage may well come, but
it could be when stocks are quite a bit higher than now.
