The Sky is the Limit?

What happens at a market top?

One advantage of living through the internet and housing bubbles is seeing market behavior at the extremes. There are two major players in the stock market: buyers and sellers—or issuers and investors. When equities topped out in 2000 and ’07, investors and issuers responded differently to the market’s financial incentives. What does this look like?

Investors begin to be driven by momentum strategies. Momentum doesn’t care about value, it just evaluates the trend. Newsletters focus more on the 50-day moving average and less on valuation, which starts to look more and more absurd. Prominent investors pull out, or say they just don’t “get” this new market. Growth dominates value as a strategy. Pundits on television start to look younger and younger.

Issuers respond as well. IPOs get bigger and bigger, even as their quality declines. Dividend yields get smaller, while stock buybacks grow. Meeting quarterly earnings goals becomes paramount, at the expense of cashflow, sales, and balance-sheet quality. Innovative financing and securitization techniques abound. Financial engineering sets the agenda.

Are we near a market top now? It doesn’t look like it yet. There are some extreme valuations, but earnings seem to be keeping up. As risk of a melt-up grows, investors seem to have nothing to fear but nothing to fear.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2013-10-25T10:31:11+00:00October 25th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

Leave A Comment