Yesterday I discussed investors’ bullish sentiment. This bullishness spans the spectrum of retail and institutional investors—and is becoming the consensus sentiment. Michael Santoli discusses this concept in a recent CNBC article (albeit with a slightly cautious view):
Still, when markets have already feasted on a run of better-than-expected news and the crowd broadly believes next year will be a good one, the threshold rises for what amounts to market-friendly developments and something often comes along to challenge the happy consensus, at least temporarily.
In theory, I agree. The rate of change in the bullish case is decelerating. And it would be outlandish to expect another +60% over the next eight months. Does that open the door for a sell-off? Not really, in my opinion.
Here are the oft-cited catalysts for the bearish case in this environment:
Rising COVID cases
Election-transition uncertainty
Fiscal stimulus stalemate
Extended equity valuations
With the exception of extended valuations, the strength in each of these bearish arguments is also decelerating. I would even suggest the market has written off these factors in a while ago. In addition, equity valuations have been extended for a while; meaning investors see no urgency in recognizing that poor future performance of extended valuations. Robinhood traders can’t be bothered with such long-term concerns when short-term gains are to be had.
So which position takes precedence—bull or bear? Michael Santoli sums it up nicely:
A bull market can be like Tinkerbell, brought alive and lit up indefinitely by audience applause alone. If only there were a way to know when the crowd will tire of clapping.
Again, I agree. There’s no doubt the bullish case is becoming consensus and explicit catalysts for a higher market are diminishing. This means little to investing though: sentiment can stay extreme for months and it only matters when investors tire of ‘clapping’.
So are we tired yet? Price action would suggest not. And I suggest Santa won’t be delivering coal this Christmas season.