What Will Happen to the Stock Market When Everyone Goes In?
The stock market is an interesting place. It tends to repeat certain things over and over again. For example, when investors get greedy and go all-in, a stock market crash eventually follows. On the other hand, when you see severe pessimism from investors, that’s generally when bull markets are born.
Sir John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” If you listen to any other famous investors and market observers, they have said very similar things. You want to be careful when everyone is optimistic and be greedy when everyone is fearful.
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The stock market, since its lows in March 2020, has made a solid move to the upside. As for the major indices, the S&P 500 has gone up by close to 95%, the Dow Jones Industrial Average has jumped by about 85%, and the Nasdaq Composite Index has surged by 118%.
With this, it must be asked where the stock market currently stands. Could a massive bull market be around the corner, or is a stock market crash right ahead?
One Chart Stock Market Investors Shouldn’t Ignore
In simple words, no matter where you look in the stock market, all-in behavior and extreme euphoria prevail.
Consider the following chart. It essentially plots the value of the stocks and mutual funds that U.S. households own.
(Source: “Households; Corporate Equities and Mutual Fund Shares; Asset, Market Value Levels,” Federal Reserve Bank of St. Louis, last accessed August 26, 2021.)
In the first quarter of 2020, Americans owned roughly $22.3 trillion worth of stocks and mutual funds. In the first quarter of 2021, this amount stood at $37.4 trillion.
Some simple math here: stock and mutual fund ownership has increased by $15.6 trillion since the first quarter of 2020. That means Americans’ stock and mutual fund ownership jumped by 67% in about a year.
To give you an idea of how big this figure is, China’s gross domestic product (GDP) is about $16.0 trillion. So, in just a matter of a few quarters, Americans poured almost the same amount of money into the stock market as the GDP of the second-biggest economy in the world.
We haven’t seen an increase in stock and mutual fund ownership like this in history. Even after the stock market crash of 2008–2009, investors weren’t this excited to buy stocks—nor after the tech bubble burst.
Scary.
The Bigger They Are, the Harder They Fall
Dear reader, the above chart is just one indicator that suggests the stock market could be in dangerous territory.
Understand this: if you meet anyone who claims they can predict the exact stock market top or bottom, run away from them. Americans going all-in on stocks doesn’t mean we’re at a stock market top yet; it’s just a sign we could be getting close.
Thanks to extreme money-printing by central banks and low interest rates, the stock market could keep going up for a while. However, when it all turns and investors become pessimistic, it may not be a pretty sight.
I will end with a quote that my football coach would often say: “The bigger they are, the harder they fall.” In other words, the higher the stock market goes, the worse the stock market crash could be.
