Four of the seven indicators, including stock market momentum and demand for risky junk bonds, are in extreme greed territory. Two other measures are in greed territory.
But is it cause for concern? Maybe.
When investors are almost universally bullish, that’s often a sign of complacency. The market may be ignoring the risks and signs of foam and glut.
Don’t fight the Fed? Or profit
Still, some experts don’t seem overly concerned, mainly because corporate earnings growth has been strong since the economy rebounded from a brief pandemic-induced recession last year. The massive stimulus from the Federal Reserve and Congress has obviously helped too.
“The rally has been justified given that revenue and earnings growth and volatility have been low since March 2020,” said Brett Ewing, chief market strategist at First Franklin Financial Services.
“Volatility has been low since March 2020. Considering all the fiscal policies and support from the Fed, it makes sense that there have been no major pullbacks,” Ewing added.
Although stocks are trading at record levels, opportunities still exist in sectors such as finance and energy.
Profits are growing at a healthy pace thanks to rising interest rates and rising commodity prices. Many banks and oil companies also pay good dividends and reward shareholders with share buybacks, increasing profits.
“You love the opportunities where companies can return money to investors through buybacks and higher returns,” said John Bailer, deputy director of equity income at Newton Investment Management.
For what it’s worth, the Fed doesn’t seem overly concerned about some of the market momentum, either.
“Recent bouts of volatility in meme stocks did not leave a lasting mark on the broader markets,” the Fed said.
Skeptical investors will, of course, recall that then-Fed Chairman Ben Bernanke noted in 2007 that “problems in the subprime market appear to be contained,” only for housing and mortgage problems to help trigger the Big Bang. Recession in 2008.
So some market watchers may have reason to be concerned that the Fed doesn’t appear to be concerned about the rise in meme stocks.