Investor Optimism and Market Valuation Are At Extreme LevelsInvestors have enjoyed a strong rebound in stock prices since the March 2020 lows, but there is ample reason the believe the rally is over-extended and that the risk of a significant decline is significant.The rally has produced a considerable amount of investor complacency, which has typically preceded market declines in the past. Evidence of the dangerous level of current investor optimism will be demonstrated in a series of charts. Examples of the extreme market valuation levels produced by this optimism will also be provided.But first, a cautionary tale that stock markets do not always go up. Investors can lose money for many years if they buy at market highs.One of the many psychological traps that produce investor complacency, such as we are seeing in today\u2019s markets, is called recency bias. It is the tendency to believe that recent events can be extrapolated into the future.Times of generally rising markets cultivate investor complacency by instilling the belief that \u201cbuy-and-hold\u201d and \u201cbuy-the-dip\u201d strategies can be safely implemented.Part of the appeal of these strategies is that they are intellectually undemanding, requiring little thought of current market conditions or prospects.Examples abound. The chart above demonstrates that investors who bought near the high of 1929 had to wait until the early 50s to break even. More recently, buyers of the Nasdaq near the Internet Bubble peak waited about 20 years to break even. Buyers of tulip bulbs during the Tulip Mania of the 1600s would still be underwater on their investment today!History has taught that the best time to buy stocks is when the consensus view is negative, and the best time to sell is when everybody is bullish. Rarely have investors been more bullish, as the following charts demonstrate.That enthusiasm for stock market investment is\u2026<\/p>","protected":false},"excerpt":{"rendered":"
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