The fools are rushing in…
The only way fools learn…
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Dear Reader,
Only fools rush in, as crooned Mr. Presley in his 1961 song.
The year is 2025. And the fools are rushing in — not into love — but into stocks.
As a percentage of net worth… United States households presently own more stocks than real estate.
This phenomenon has only transpired on two previous occasions spanning 65 years.
Equities and mutual funds presently constitute some 31% of household wealth — a record high.
By way of comparison, the 2000 technology bubble’s peak came in at a mere 25%.
Cash Allocations Are at Record Lows
Global fund managers are likewise rushing in. Their cash allocations presently gutter along at 3.3%.
That is the lowest percentage since such data collection began in 1999.
For the sixth consecutive month cash allocations have hovered at or beneath 4% — one of the lengthiest streaks in the annals.
Cash allocations at or below 3.6% have been previously observed on a mere nine occasions.
Mr. Elyas Galou is an investment strategist at Bank of America. Here is what he says about present cash allocations, his teeth chattering some:
Even at the height of previous bubbles, investors did not dare to go to these levels. It means positioning is fragile to any bearish developments . . . any bad news is going to do a lot more damage.
I hazard this fellow is correct. Yet fools are rushing in.
Margin Debt Is Also at Record Levels
And would it surprise you to learn that United States margin debt comes in at a record $1.21 trillion?
And that United States margin debt has jumped for seven consecutive months… by $364 billion?
It would not surprise me one jot. And it does not surprise me one jot.
Adjusted for inflation, The Kobeissi Letter informs us, year-over-year margin debt has expanded by a record percentage, 32%.
The same Kobeissi Letter informs us that margin debt — as a percentage of the M2 money supply — rises to its highest summit since 2007.
Only during the 2000-01 deliriums was that percentage greater than the present percentage.
I could continue, yet you have the flavor of the stew. You require no additional seasoning.
The Great Divergence Between Wall St. and Main St.
And so you have the taste of the stock market. Shall we now gauge the test of the broader economy it supposedly reflects?
We shall. And we once again turn to the The Kobeissi Letter’s culinary experts:
The US consumer sentiment assessment of current economic conditions has declined to 50.4 points, the lowest level on record.
This is 5 points and 8 points below the lows seen in 2022 and 2008.
By comparison, the index stood 11 points higher in 1980, when annual inflation was at 13.5%.
This comes as Americas' perception of current buying conditions for big-ticket items deteriorated to the lowest level on record.
An ongoing affordability crisis and a weakening labor market continue to weigh on household finances, dragging consumer sentiment lower.
Consumers have rarely been this pessimistic about the economy.
More:
The number of Americans employed part-time for economic reasons jumped +909,000 in October and November, to 5.5 million, the highest since March 2021.
This counts workers who want full-time jobs but cannot find them, usually because hours were cut or full-time work is unavailable.
Since June 2022, the number of people working part-time for economic reasons has risen +1.9 million, or +51%.
As a consequence, this metric now represents 3.2% of the total labor force, the highest since May 2021.
This is in-line with levels seen at the beginning of the 2008 Financial Crisis and above the 2001 recession peak of 3.0%.
Watch out for “Mean Reversion”
If the term “mean reversion” has anything in it — I have stated before that I believe it does — the fools rushing into the stock market are in for a good, hard whaling.
I simply cannot announce the day or the hour.
I concede it is possible that the stock market may rampage clear through 2026 — and perhaps even beyond.
That is because manias can defy all logic, all sense. And market manias are often the most maniac of all manias.
Yet the stock market will dash inevitably upon the rocks of mean reversion. As I have argued before:
Scales balance ultimately, that which goes up comes down, that which goes down comes up…
the mighty fall, the meek inherit the earth.
I hazard stock market and economy will meet once again on fair ground.
I further hazard they will meet upon the economic level — not the stock market level.
Reality Will Catch up to the Stock Market
Mr. Lance Roberts of Real Investment Advice:
Stocks cannot indefinitely grow faster than the economy over long periods. When stocks deviate from the underlying economy, the eventual resolution is lower stock prices…
For example, in 2000 and again in 2008, earnings contracted by 54% and 88%, respectively, as economic growth declined…
As earnings disappointed, stock prices adjusted by nearly 50% to realign valuations with weaker than expected current earnings and slower future earnings growth.
So while the stock market is once again detached from reality, looking at past earnings contractions suggests it won’t be the case for long.
That is, the stock market will revert to mean — and perhaps soon. In conclusion:
The deviation from long-term growth trends is unsustainable. Such was caused by repeated financial interventions by the Federal Reserve. Therefore, unless the Federal Reverse is committed to a never-ending program of zero interest rates and quantitative easing, the eventual reversion of returns to their long-term means is inevitable.
The Only Way Fools Learn
I would note merely that the Federal Reserve may commit to a never-ending program — of quantitative easing at least.
Just this month it has begun the business anew… absent the official designation.
Yet I am with Mr. Roberts. I believe that stock market deviation from long-term growth trends is inevitable.
Mean reversion is the rock of my belief. Yet once again, the fools rush in.
And as old Benny Franklin noted long ago:
“Experience runs a hard school, but fools will learn in no other.”
Regards,
Brian Maher
for Freedom Financial News
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