Stock market bearishness is practically extinct. You would have to travel back in time to 1987 to find a greater level of disparity between investment adviser bulls (64.4%) and bears (13.3%).
The mainstream media continue to fuel the enthusiasm for equities by touting desirable tailwinds, including tax cut-led economic growth, low inflation, and full employment. Indeed, these conditions are favorable for the time being.
What the mainstream media are missing, however, is the nature of asset bubbles themselves. Specifically, asset balloons rarely deflate slowly. They tend to burst. And when they do, recessionary pressures develop in the economy, making it more difficult to patch holes in the latex.
For example, there were precious few well-regarded analysts and economists at the turn of the century who believed that the stock market was in danger of collapsing or that the economy itself was in danger. On the contrary. Virtually every prominent voice advocated that stocks deserved ridiculously high valuations because of “New Economy” particulars (e.g., strong economic growth, low inflation, full employment, etc.).
When the dot-com tech bubble exploded in March of 2000, an obvious catalyst did not exist. In fact, the most that anyone might claim is that the Federal Reserve had been raising overnight lending rates between the Asian currency crisis lows of 1998 (4.75%) to the 2000 May highs (6.5%). Some could argue that the Fed went too far and should have stopped its tightening campaign long beforehand.
So the bursting of the 2000 tech bubble would not have occurred and the NASDAQ would not have registered -76% (3/2000-9/2002) had Fed officials been savvy enough on rate policy? Really? If you believe that, then you're making my point for me; that is, central bank policy error is a ubiquitous threat whenever an asset balloon exists.
Today, stocks are egregiously overvalued on a dozen popular measures, from regression-to-the-trend to price-to-sales (P/S) to price-to-earnings (P/E) to the Warren Buffett Indicator (market-cap-to-GDP). Without question, it is becoming more difficult to argue that the current asset price balloon does not share many similarities with March of 2000.
Couldn't one say that the employment landscape is favorable for stocks? Perhaps. Then again, the stock asset bust in March of 2000 led to layoffs, a reduction in employer/consumer spending and less willingness to add to debt. Stocks had fallen into a severe bear market long before the economy had entered a recession 12 months later in March of 2001.
