Friday, March 15, 2013

Are Stock Investors "Irrationally Exuberant"?

According to global equity strategist Michael Hartnett at Merrill Lynch, $14 billion flowed into equity mutual funds this week, dwarfing the $3 billion inflow into bond funds.

Year-to-date, nearly $93 billion has gone into equity funds.  If this trend continues, according to Hartnett, equity funds will received nearly $400 billion of fresh investments this year.

According to my estimates, this would represent nearly two-thirds of the funds which had left equity funds during the 2007 - 2012.

The appetite for stocks has been rekindled, it appears, helped by the fact that the S&P is up more than +10% through yesterday after a +16% gain in 2012.

Even actress Mila Kunis - who had been stashing her savings in cash - announced on CNBC yesterday that she has started to buy stocks.

So are investors "irrationally exuberant"?

According to the man who first made popular the phrase "irrational exuberance", former Fed chairman Alan Greenspan thinks that investors are not wrong in reallocating saving to stocks.

In a talk on CNBC yesterday with Andrew Ross Sorkin, Greenspan observed that he thought that stocks were significantly undervalued.   Here's what the CNBC website reported:

Although blue-chip stocks are hitting all-time high after all-time high, former Fed Chairman Alan Greenspan told CNBC Friday that "irrational exuberance" is the last term he'd use to describe today's market. 

Greenspan said in a "Squawk Box" interview that stocks by historical standards are "significantly undervalued" even considering the recent moves higher. He added that the payroll tax increase didn't dent spending because of rising asset prices. 

CNBC went on to note:

Greenspan coined the phrase "irrational exuberance" in 1996, when he was asked a question about soaring stocks at that time. The year 1996 was coincidentally the last time the Dow Jones Industrial Average had its last 10-session winning streak.
In the interview, Greenspan bases his analysis largely on the fact that relative to other asset classes - particularly bonds - stocks are trading at an historically cheap valuation.

His thoughts are in line with my post yesterday.  Stocks have rallied sharply in the last few years, but are even now only +10% higher than they were in 2008.  Corporate profitability, meanwhile, has risen by more than +50% during the same period.

In this context, then, stocks are really only reflecting reality.