Investors may be seeing the first signs of the stock market bubble beginning to pop. Bloomberg is reporting a 5-month increase in retail investors in the S&P for any “like stretch since 2014”. At the same time, hedge funds, corporations and executives are starting to back out of equities.
The entrance of individual investors is traditionally a sign a bull market is being fueled by euphoria and less experienced investors. Top investors are usually the first ones to buy into the market, followed by less knowledgeable ones looking to take advantage. Retail investors tend to have less strategy and make more impulsive decisions, which can drive up asset prices and create a bubble.
Peter Schiff has been predicting the Fed-fueled stock market bubble for a year now. Low interest rates and borrowing costs have flooded markets with easy money, and valuations are still at their highest since 2008. Bank of America is reporting that fund managers are holding 1% less cash (5.8% to 4.8%) since a 15-year high hit last October. Less cash means more investment and less room for upside in US equities.
While some are suggesting more evidence of a “general sense of euphoria” is needed to call a top on the market, others are taking cues from past trends. Bloomberg reports, “current equity holdings are comparable to peaks in 1968 and 2007.”
Insider buying is also in decline with fewer executives investing in their own companies. According to InsiderScore, about 2,300 insiders bought shares of their companies last month, down from a one-year high reached at the start of the month.
Macro hedge funds are also mitigating their exposure to securities, while continuing to maintain a position in the dollar and commodities, according to Bank of America.
One of the most telling signs the market may be nearing a medium-term top in equities is the drop in corporate buybacks, which has slowed down significantly. Last year, US firms cut the purchase of their own stocks by 6%, the biggest drop since 2009.
What these moves signal is a retreat from stocks and bonds and an over-valued market set for a major correction. Most of the post-election Trump-effect on stocks is subsiding. While investors are still clinging to hopes of fiscal stimulus in the form of infrastructure projects, the latest defeat of Trumpcare and the lack of Republican support on the debt ceiling fight may complicate funding for major projects.