USA TODAY International Edition
Is the Dow climbing too high, too fast?
After sprinting to 26K, investors warn of froth
The Dow’s record-fast sprint to 26,000 early in the new year is raising concerns on Wall Street the stock market may be in danger of overheating.
Indeed, the Dow Jones industrial average’s more than 1,000-point rise from 25,000 to “26K” in the past seven trading days has some investment pros warning the nearly 9-year-old bull market may be entering its “euphoria phase” — which typically marks the final stage of a long, upward climb for stocks.
The Dow briefly topped 26,000 for the first time Tuesday, rallying almost 283 points to an intraday record of 26,086.12. But the 30-stock index gave back all its gains and finished the session down 10 points at 25,793.
This stretch of a bull market is characterized by higher share prices, rising investor optimism and fresh cash being funneled into the stock market by investors who fear missing out on gains despite the market’s lofty levels.
The fact that stocks could be entering this phase, however, doesn’t necessarily mean the bull market will unravel overnight. For example, while then-Federal Reserve chairman Alan Greenspan warned of investors’ “irrational exuberance” in December 1996, the dot-com stock boom didn’t top out until March 2000, or more than three years later.
“We’re in the latter stages of this bull market, but the final stage could last another two or three years given the length of the run so far,” says Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte.
The latest leg up in stock prices has been driven by more than just investor exuberance, however. Other factors fueling the surge this year are the simultaneous growth in economies around the world, and the expected boost to U.S. company profits and the American economy from massive tax cuts. The most common bull market killer — an economic recession — is not on the horizon for now, either, with U.S. GDP growth perhaps getting back to 3% this year.
Still, a stock market that is going up this far, this fast could place it at greater risk of a sizable pullback.
“The speed at which the market has moved higher in the past two weeks is unsettling, and the risk of overheating this year is rising,” Zaccarelli says. “The more expensive the market gets, arguably the more risky it becomes.”
A 7% to 12% market drop at some point this year, he says, wouldn’t surprise him.
Too much exuberance could be a dangerous thing, as it suggests Wall Street has gone from not just positive on stocks but “all in,” says Brad McMillan, chief investment officer for Commonwealth Financial Network. “We seem to be seeing that now.”
Edward Yardeni, president and chief investment strategist at Yardeni Research, worries that the market, which he predicted would rise nearly 16% by year’s-end, will hit his bullish target months ahead of schedule.
That would be a sign of froth, boosting the odds for a stock market pullback.
“No one is getting in early here,” Yardeni says. “And there’s a good chance they are getting in late.”