From the desk of Willie Delwiche.
Key takeaway: Evidence of excessive optimism abounds. Recent articles in the Wall Street Journal provide anecdotes for the data: Conservative German savers are increasing their exposure to stocks and investors in the US are crowding into the market, focusing more on chasing returns than managing risks. Cyclical views trend and strategic positioning point to elevated risks but stocks have been buoyed by a favorable news backdrop (positive economic data surprises and upward earnings revisions) and resilient breadth. If these falter and investor appetite for risk fades, those areas of the market where speculative fever has burned the hottest could be the most vulnerable.
Sentiment Report Chart of the Week: Long Equity Camp Crowded
Household equity exposure finished last year near record levels. Preliminary data suggests it has now exceeded its previous peaks. There is a strong inverse correlation between starting household equity exposure and stock market returns over the ensuing decade.