“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” -Sir John Templeton
I’m a huge fan of John Templeton. He was one of the greatest investors of all time and shared a wealth of knowledge with us like the quote above (and this other one I wrote about just over a year ago). Some have used this quote recently to suggest that because we haven’t yet seen any signs of euphoria the bull market still has plenty of room to run. I have a different take.
I have argued recently we have actually seen plenty of signs of “euphoria” including a record streak in extreme bull/bear readings in the Investors Intelligence survey, a record high in the Rydex bull/bear ratio, a record high household equity allocations relative to money market fund assets and a record high margin debt levels, both in nominal and relative (to GDP) terms.
But let’s look at the actual definition of the word.
Euphoria [yoo-fawr-ee-uh, -fohr-]
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a state of intense happiness and self-confidence.
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psychology. a feeling of happiness, confidence, or well-being sometimes exaggerated in pathological states as mania.
In using the Templeton quote to determine where we are in the sentiment cycle, we are looking for are signs of ‘intense or exaggerated confidence’ as a warning the bull market may be running out of steam. As noted above, households currently have one of their largest allocations to the stock market in history. In fact, over the past thirty years they have never allocated more money to stocks relative to money market funds. If this isn’t a clear sign of confidence in the stock market I don’t know what is.
Still, some point to persistent outflows out of equity funds as a sign investors are far from “euphoric” about the stock market. The trouble with this line of thought is if investors were pulling money out of the stock market due to lack of confidence in the stock market then their allocations to equities relative to other asset classes would have to fall. That’s just not the case.
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