Signs of euphoria suggest equity bulls are on borrowed time – Financial Times

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Unless the economic data cruelly mislead us, the world economy has reached a point where it can grow in a strong and co-ordinated way. The data admit little other interpretation (even if US job growth is slowing as full employment nears). The world has not looked so well poised for growth in at least a decade.

We can now expect a political debate over taking the credit for this and that is fair enough. If the current rosy scenario is confirmed over the next year, many will be able to claim vindication. So far, President Donald Trump has not had anything like the negative impact on economic growth and confidence that many of us feared. And the desperate monetary policy measures that central bankers used to stave off a second Great Depression look as though they might actually allow the world economy to take off again without having to endure a crash or a bout of hyper-inflation first.

But asset prices do not overlap with the economy, at least in the short run. So I want to ask this question: after almost a decade in which a tripling of the US stock market has failed to generate any excitement or even any great feeling of wellbeing, are we at last reaching a point of euphoria? I suspect the answer is yes. And in the counterintuitive world of financial markets, that might be bad news. It will certainly be challenging to navigate.

The most positive strands of 2018’s first week came from companies, which unusually are telling stockbrokers to brace for higher sales and earnings, and from supply managers who are braced for a restocking boom, as a sharp increase in new orders catches them with low inventories.

The eurozone, after suffering worse than the rest of the developed world after the credit crisis, is now not only recovering but in the lead. All are valid reasons for optimism.

Now look at media coverage. By far the biggest story of the week is that the Dow Jones Industrial Average, the oldest index of the US stock market, passed 25,000 for the first time. This continues a rally that started in March 2009 and the Dow itself is an obsolete index with incurable mathematical flaws. Nobody who actively invests in markets uses it.

Yet many media outlets reported that its rise from 24,000 was the fastest ever move between 1,000-point landmarks, ignoring that each 1,000 points is less than the previous one in percentage terms — and that the Dow twice covered a 1,000-point gap this quickly in the past.

President Trump and his supporters have cited the market’s rise as evidence of economic recovery. To quote the president in a tweet: “Record fastest 1,000 point move in history. This is all about the Make America Great Again agenda! Jobs, Jobs, Jobs.”

There are two problems with this. First, jobs growth over the first 11 months of this presidency has been its slowest since 2011. There is nothing surprising or untoward about this after years of growth but jobs growth is nothing special. Second, the US stock market has risen less so far under Trump (20.4 per cent) than at the same point in President Obama’s first term (41.4 per cent) or even the second Obama term (22.7 per cent). If the stock market is a measure of presidential and economic performance (it is not), then this president is badly lagging his predecessor.

I say this not to hurl abuse at Mr Trump but to highlight the response, of intense excitement. In the last year, and especially the last few weeks, Americans have at last noticed that their stock market and their jobs market have been rallying since 2009. Stronger rises under Obama drew nothing like as much attention as these recent numbers.

This says something about Mr Trump’s skills as a salesman but it also suggests that market euphoria has arrived. Bull markets generally do not end without a euphoric “melt-up”. Jeremy Grantham, the stock market sage, worried this week that, while the market has obviously been overpriced for years, the melt-up (seen in the acceleration since the tax cut plan was unveiled a few months ago) was only just beginning.

Euphoria is hard to measure and Mr Grantham concedes that it requires “touchy-feely” metrics. On this basis, media coverage suggests belated euphoria. The ongoing cryptocurrency mania exhibits bubble psychology.

And a good sentiment survey, by the American Association of Individual Investors, shows that 59.75 per cent are bullish, and only 15.5 per cent are bearish. Only a month ago, these numbers were 37 versus 34 per cent.

This survey is a great contrarian indicator. Bears outnumbered bulls to the greatest extent ever the week that the great rally started in 2009. And this is the most bullish investors have been since then, barring one week before the brief, brutal market downturn of 2011.

It looks like euphoria is here. It may end soon, or it could easily last more than a year, as it did in 1999 and 2000. Enjoy it while it lasts. Don’t exit the stock market altogether. But start to plan now for the moment when it ends.

john.authers@ft.com

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