Notes of Caution on Stock Optimism

The most recent Economist magazine attempts to reign in some of the enthusiasm for stocks that seems to be prevalent these days.

In its "Buttonwood" column, the magazine notes that last year's gains came despite relatively sluggish revenue and profit growth rates for many global companies.

It argues that the some of the main drivers of strong market returns stemmed from an unexpected save of the euro and the relatively low valuation of shares at the beginning of 2012:


The rally was largely the result of two factors. First, pessimism about the prospects of a euro-zone break-up was lifted by the willingness of the European Central Bank to buy the bonds of troubled nations. With his pledge to do “whatever it takes” to save the euro, Mario Draghi became the pin-up boy of the equity bulls.

Second, many equity markets started the year looking reasonably cheap, particularly in comparison with government bonds. Investors were attracted to corporate bonds and to shares with a decent dividend yield, since the income available from government bonds and cash had dwindled to historically low levels.

http://www.economist.com/news/finance-and-economics/21569035-investors-are-optimistic-2013-unlikely-be-bumper-year-hope-springs?frsc=dg|a

Today, with valuation of stocks now in line or higher than historic averages, the Economist argues that returns this year are likely to be less than many expect.

Credit Suisse global strategist Andrew Garthwaite agrees with the cautious tone of the Economist article, noting that the recent enthusiasm for stocks has created an environment where conditions for a significant stock market "correction" are at hand.

For example, Garthwaite notes that the bullish sentiment among advisors now stands at two year highs:



Here's how the blog Business Insider describes Garthwaite's mood:

Credit Suisse's global equity strategist Andrew Garthwaite and his team are reducing their exposure to stocks after the recent run-up in the S&P 500. Garthwaite points out that there has been a sudden increase in risk appetite in the last month, sentiment towards stocks has jumped to a two-year high, and financial advisors have turned bullish but insider selling continues.

He warns, "many of our tactical indicators point to a consolidation phase in the equity markets, in the near-term".

Read more: http://www.businessinsider.com/financial-advisor-insights-january-07-2013-1#ixzz2HOKu9XcQ

I have never been a particularly good market timer - and I really don't know that many investors who are, frankly - but reading such somber commentary does give me pause.