Are we near a market top?
With the Dow nearing 17,000 and measures of volume and volatility fairly low, many folks are saying that the end of the five-year bull run is near. It’s true that valuations are stretched. The US stock market has nearly tripled since 2009. It’s also true that sentiment indicators show that market bears are harder to find than beach bums in a tuxedo store. But discerning the top of a bull market isn’t like looking at the top of a mountain. You can’t just set your altimeter and declare, “We’re here.”
Markets aren’t objective, physical things. They’re the agglomeration of millions of buy, sell, and hold decisions on contingent claims on future cash flows. Sentiment and fundamentals matter, but so do economic growth, inflation, trade, politics, and myriad other factors. The world of human interactions is extremely complex. It’s hard to understand what’s already happened, much less what is going to happen next week, next month, or next year.
Like most market participants, we have a forecast of what we expect from the economy and market from year to year. But our investment process doesn’t depend on correctly calling the market’s turns. It’s driven by finding value and structuring portfolios so they have the right combination of return, risk, and other issues for each investor.
Bull markets mature on optimism and die on euphoria. Investors seem pretty optimistic right now. But euphoric? That’s impossible to tell.
Douglas R. Tengdin, CFA
Chief Investment Officer