|Since 2023, not a week has gone by that a person doesn’t ask me why I remain so bullish in the face of such uncertainty. While it is true that I am quite optimistic on such things as AI and lower interest rates, the primary reason behind our outlook, which correlates with our portfolio positioning, is due to continuous reports of just how pessimistic most market participants are. In fact, just the other week I caught a headline that I’m sure didn’t garner much attention at all that yet again Money Market accounts have hit a new all-time high.
My point of this piece is for you to fully grasp and understand the irony of a report like this. The S&P 500 and Dow Jones Industrial averages are trading at levels they have never seen in their entire history, yet more money is held in Money Market accounts than ever before in history. Does that strike you as odd?
Just for a moment, let us put on our game theory hats and enter the mind of someone sitting on the sidelines. In 2023 the S&P 500 was up over 25% while a more diversified account with international, emerging market exposure or others may have done anywhere in the 15 – 17%. Mix in a few bonds for a conservative portfolio and you may be in the low double-digit category. A person sitting on the sidelines, cozy in their 5% money market may scoff at 2023 and pay it very little attention.
“You won’t fool me” they may say. “Sure, one year of solid returns is fine but any day now this market is going to crash.”
Imagine for a moment that this person, while sitting on the sidelines, is now forced to make a decision. Sit in money market for another year earning their 5%, or less should rates begin to fall, or buy back into the markets at all-time highs. Do you think they’ll actually make a move back into stocks here? Unlikely. Their rationale is simple, once the market pulls back to a more ‘reasonable’ level, that’s when they’ll feel comfortable getting in. But will they? In my experience, no. You see, if the market pulls back, it will likely be due to something scary, such as missile attacks in the Red Sea, or a government on the verge of a debt ceiling or the US Presidential Election uncertainty. When a pullback comes, the fear of going back into the market will overcome any rational thought and they will more than likely remain idle on the sidelines.
So, what will it take for Money Market accounts, which sit at all-time highs, to be reduced? Do you think it will take a market decline? In my opinion it will take just the opposite.
In my opinion the fear of missing out or FOMO will have to become so overwhelmingly strong that a person throws caution to the wind and rather than sitting idle decides they’ve missed out on too many gains and must re-enter. It’s at that time, in my opinion, it will be the time to reduce exposure and gladly sell these late comers our holdings.
One year of missed opportunity may not be enough to bring people back into stocks, but what if we see another year of outsized gains? What if the election doesn’t create the big pullback that so many people are expecting? What if interest rates start to come down such that those cozy money market accounts aren’t earning 5% anymore but find themselves in the 2-3% all while the market has had additional years of strong gains?
Unfortunately, while the S&P and Dow are at highs, most people don’t realize that there remain other areas still a long way from highs. While the headlines of the broader averages will keep most people on the sidelines, the Small Cap index is currently trading at levels more than 20% off highs. The mid-cap index is also 10% off highs with some very attractive companies at very reasonable valuations. Unfortunately, most people will fail to look under the hood of where there is real potential should they actually desire to reallocate funds back into stocks. In my view, it will take all of these areas making new highs until the greed and FOMO really set in.
What fascinates me more than ever about this current environment is the hate and disdain I pick up from investors when they think about the stock market, yet the stock market continues to move to new highs without them.
I’ve been at this game a long time and the old adage, in my opinion, always rings true. Bull markets begin on disgust and die on euphoria. In my view we’re a long, long way from euphoria.