Bulls will be bulls.
That’s a simplistic, but plausible, explanation for a variety of market trends that reflect a welling-up of animal spirits.
A smattering of reports in recent weeks point to a revival of risk-seeking attitudes. These include a surge in penny-stock trading, a rising appetite for corporate mergers, the outperformance of stocks of highly indebted companies and wealthy investors’ willingness to borrow heavily against their brokerage accounts.
Recklessness always invites injury, and ultimately a heedless rush toward greed is how most Wall Street parties end.
Yet, as I discuss here with Yahoo Finance Editor-In-Chief Aaron Task, most of the aggressive behavior we’re seeing so far looks a lot like a bull market acting like a bull market.
Stocks have been on the rise, with some rude downside interruptions, for more than five years, sending the Standard & Poor’s 500 Index to a new record of 1911, up 183% from its March 2009 low.
Over that span, leadership has changed numerous times, from financial stocks to go-go growth technology to boring blue chips to global growth plays. This, understandably, has motivated many investors to hunt for the next hot thing. The penny-stock surge has been largely fueled by marijuana-stock speculation, and email stock-hawking services, reminders of the bad old days of pumping sketchy stocks.
Yet, broadly speaking, it’s hard to argue that the little guy’s mouth is frothing with stock lust. Inflows into equity funds have been more like a trickle this year, and surveys of individual investors show lots of fence-sitting confusion rather than bold upside expectations.
The gut check in small-cap and high-expectation growth stocks since March has tempered valuations, cooled investor sentiment and allowed the indexes to digest some of last year’s dramatic gains. Given all this, the bulge in penny-stock trading – which has also boosted the shares of OTC Markets Group (OTCM), which runs the old “pink sheets” market – seems more sideshow than main event.
The broad context for much of the embrace of risk is low global interest rates and easy money. With developed-world central banks keeping official rates near zero and flooding the system with fresh cash, yield is scarce and professional investors are chasing what little there is.
Junk-bond yields are near 5%, where Treasuries traded before the financial crisis. No-strings loans are being handed to businesses large and small. As the Wall Street Journal recently noted, brokerage firms are hustling to offer wealthy clients ultra-cheap credit lines backed by their stock-and-bond holdings.
And big companies, after years of husbanding cash and buying back stock, are increasingly taking the offensive with gambits to grow through acquisition. The cable, satellite, pharmaceutical and food industries are being jostled by big, regulator-challenging, debt-enabled deals.
Meantime, financial markets have been remarkably – some would say ominously – calm, with measured and expected volatility pressing against multi-year lows across equities, bonds and currencies.
Strung all together, it’s understandable why some are using these plot points to push a story of mass overconfidence, mispricing of risks and the threat of a nasty market downturn.
Maybe so, but the higher probability interpretation is that these are core features of bull markets – hope overtaking caution and easy money being grabbed. Eventually, bull market behavior gets unequivocally silly right near a market top. But it’s far from clear that we’re there – or even very close to this point – just yet.