Morning Jog



There is no CNBC announcement at each crossing of John Templeton’s four stages of market sentiment: pessimism, skepticism, optimism, and euphoria. But to borrow from Justice Stewart’s definition of obscenity – you know it when you see it.

And signs of euphoria are popping up everywhere.

The latest survey from the American Association of Individual Investors shows bulls outnumbering bears by the largest margin in three years. Fund flows into equity funds have accelerated. Margin debt is at the highest level in a decade, adding fuel to the market’s ascent. And short sellers have given up, with the average short interest in an S&P 500 component stock falling to a 17-year low.

[Source: Bloomberg]

The record highs in the stock market are not without merit. Equity markets ran up in anticipation of a robust recovery and economic data and corporate earnings are now catching up.

Jobless claims are continuing to trend lower, retail sales are booming and manufacturing sector can’t keep up with the backlog of orders. As the first quarter earnings season gets under way, more companies are beating already-upsized analyst earnings estimates and doing so by 20% on average.

The direction is one of a healing economy and stronger growth momentum. Of course, as the market climbs and moves further away from the pessimism stage, the investment environment becomes more challenging. The Equity Risk Premium – measured by the expected earnings of the S&P 500 over and above the risk-free rate – is at a level last reached in 2018, just before worries about slowing economic growth, tariffs and some misplaced comments from Fed Chair Powell cratered the markets in the fourth quarter.


I am not implying that we are on the precipice of a near 20% decline as we saw back then. But optimism is abundant, investors are in full “risk-on” mode and expectations are high for sustained economic growth. We could very well be in for a prolonged period of lower market returns, as the economic and earnings recovery starts to outpace the stock market response.


Alexander Bass CFA, CFP®
Managing Director
Chief Investment Officer
Nucleus Advisors