Close Close

Portfolio > Economy & Markets > Stocks

Why Stocks Are at a ‘Permanently High Plateau’

Your article was successfully shared with the contacts you provided.

Who can argue with the S&P 500’s 155% gain since March 2009?

The current run has already surpassed the impressive 101% gain from October 2002 to October 2007. In fact, the five-year S&P chart is so awe-inspiring, it’s now on the verge of rivaling Michelangelo’s David in the canon of masterpieces.

The S&P 500 has made one all-time high after another this year and gained nine out of the past 10 years.

Bears along with people heavily invested in cash are getting awfully itchy. Do I jump in now or do I wait for a crash? This is their dilemma.

Instead of jumping on the equity bandwagon, fund investors are pouring money into bonds. Bond funds worldwide took in $6.3 billion during the final week of May for an amazing 12 consecutive weeks of investor inflows.

Meanwhile, equity funds lag on inflows versus bonds and are currently losing the popularity contest with fund investors. This kind of fund flow behavior can rightly be interpreted as a contrarian indicator and a perfectly acceptable reason for why U.S. stocks can continue their supernatural march higher. 

Trading wizard Jesse Livermore once called it the “pain trade.” His theory was that stocks move in whatever direction that causes the most people the maximum agony.

Livermore knew what he was talking about. He scored a $100 million payday during the 1929 stock market crash. By 1934 he was broke.  

Remember David Rosenberg? He’s a well-known economist who was formerly an outspoken bearish deflationist.

To the chagrin of bears everywhere, he switched gears last year by turning bullish.

“2014 is going to feel a lot like 2004 and 1994, when the U.S. economy surprised to the high side,” said Rosenberg, chief economist and strategist at investment manager Gluskin Sheff + Associates.

History is repeating itself, darn it!

Just three days before the 1929 crash, Yale professor and economist Irving Fisher said, “Stock prices have reached what looks like a permanently high plateau.”

In retrospect, it was a brilliantly foolish thing to say. But how was Fisher supposed to know that stocks were crusin’ for a bruisin’?

My instincts say the stock market needs way more Kool-Aid drinkers to join it. There still aren’t enough barbers, babysitters, and taxicab drivers that own an undiversified portfolio of Twitter, Weibo, and GrubHub. We need them to join the party ASAP.

Investor cash flows are saying there’s still a high degree of skepticism about equity prices at all-time highs.

On top of that, there are still far too many bearish types calling for an imminent crash.

We need more of them to pull a David Rosenberg by turning bullish. And until that happens, the stock market has most certainly reached a “permanently high plateau.”