The stock market may be getting too hot
There are a growing number of signs the bull market in equities is overheating, with indicators of investor complacency and risk-seeking reaching the highest levels since 2007 and 1999.
Why it matters: Those periods of extreme euphoria were followed by market crashes.
What's happening: As of late February, investors already had levered up with a record $814 billion borrowed against their portfolios, according to Financial Industry Regulatory Authority data.
- That's a 49% year-over-year increase, the largest since 2007.
- The prior high was during the dot-com bubble in 1999, WSJ reports.
Watch this space: Professional money managers already have started selling.
- Data from Bank of America show the bank's large institutional clients were net sellers of equities for the fourth straight week last week and hedge funds are starting to join them.
What they're saying: "Last week, as the S&P 500 breached 4000 and our work suggests increasing signs of equity euphoria, BofA Securities clients were net sellers of US stocks," the company's data analytics team said in a note.
- The bank's sell-side indicator rose for the third month in a row to a 10-year high and the closest to a contrarian "Sell" signal since May 2007, analysts noted.
- Further, BofA points out that since March 2020 the average recommended allocation to stocks has risen by more than three times the typical rate following prior bear markets.
Be smart: "Increasingly euphoric sentiment is a key reason for our neutral outlook as the cyclical rebound, vaccine, stimulus, etc. is largely priced into the market."
- "We've found Wall Street's bullishness to be a reliable contrarian indicator."
One level deeper: The Cboe's volatility index fell another 5.3% on Wednesday to 17.16, the lowest it has been since February 2020.
- "This low level continues to suggest complete complacency by investors – so worries over rising rates or rising inflation once again appear to be on the back burner," Kenny Polcari, managing partner at Kace Capital Advisors, says in a note.
Yes, but: Big names like JPMorgan CEO Jamie Dimon are taking the other side of that bet. In his annual letter to shareholders, Dimon argued strong consumer savings, vaccine distribution and the proposed infrastructure plan could lead to a "Goldilocks moment" for the market, replete with sustained growth and slow inflation.