You may have noticed investors have been pretty enthusiastic about U.S. stocks in recent weeks. It’s possible the Dow Jones Industrial Average will surpass 20,000. The fervor for U.S. stocks may be due to improving corporate earnings growth or it may reflect expectations for the incoming U.S. President. The Economist reported:
“…the American stock market rally since the election has been quite remarkable, given the qualms expressed by many investors before the election. The big hope is that Mr. Trump will focus on his plans for fiscal stimulus and corporate tax-cutting; this will boost America’s economy and corporate profits. But, it may also push up inflation so investors are switching out of Treasury bonds and into equities. At the same time, investors are counting on Mr. Trump to forget about, or downplay, his protectionist rhetoric; as yet, they have been remarkably sanguine about his twitter wars with China.”
Last week, the American Association of Individual Investors (AAII) Sentiment Index showed more than 40 percent of participants (44.7 percent) are optimistic share prices will move higher during the next six months. The historic average for bullish sentiment is 38.4 percent. About 32 percent of participants were bearish, which is also above the historic average of 30.3 percent. It’s interesting to note the percentage of bearish participants rose by 5.8 percent from the previous week when it was below the historic average.
Any time investors become exuberant, the words of Warren Buffett come to mind: “Two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable…We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” The U.S. bull market may have further to run, but contrarians may see better relative opportunities elsewhere.
Sources:
https://www.economist.com/blogs/buttonwood/2016/12/wall-street
https://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_12.9.16 (Page 5)
http://www.aaii.com/o/sentimentsurvey
http://www.marketwatch.com/story/the-genius-of-warren-buffett-in-23-quotes-2015-08-19
https://www.brainyquote.com/quotes/topics/topic_leadership.html
