Ever since Donald Trump was elected President the market has been on a stead run. A few pauses have occurred and no real pull backs to speak of have taken place. We aren’t talking about a period of a few weeks or a month, but a 5 month period. While this is good news for anyone long in the market, I have a sense that we are in a period where market complacency has extended to many investors. The fear that gripped the market as it traded sideways for over a year seems to have melted away.
A bull market has a way in which investors can get lulled into a feel good pattern of a quasi cruise control. Yet, an exuberant market can get ahead of itself and eventually profits are to be taken. When this happens selling occurs and when the share of sellers begins to outweigh the buyers, then the bears get the upper hand.
I continue to go back to the fact that the average investor is continually becoming older and more risk adverse. By this I mean demographically we have a larger share of older people who are invested in the market and dependent upon the market’s returns for their livelihood in their retirement. As long as the market creeps higher, the demographic fact doesn’t really matter much. Once the market has some degree of a correction the demographic fact matters a lot. A greater share of market participants with a higher aversion to risk can exacerbate a market correction. Why? Because when they smell risk they are more prone to run for the exit rather than wait out the storm. This can cause a stampede of selling.
Tomorrow is May 1st and as the old saying goes, “Sell in May and go away.” That is sometimes true, but certainly not always. I have no great market predictions to give, only a word of caution given the market’s strong performance over the last five months and the fact that more and more investors are either retired or can see retirement on the horizon.
The market can sprint higher only for so long, just as a runner can sprint for a set period. After a sprint, a runner will either slow their pace considerably or stop and rest. The overall market is comparable to a runner. Too much, too fast leads to a period of rest. Is that what we see in today’s market? The complacency we are experiencing today says otherwise, yet I would suggest that you don’t let comfort get the upper hand.
