Where is the Investor Euphoria?

After a huge gain in 2013, US equity markets posted fantastic two and five year return numbers. Somewhat surprisingly, the average investor seems to be rather apathetic given the huge run up in the market. For instance, CNBC core viewership hit two decade lows in 2013. Barron’s polled advisors and while the majority think stocks are the place to be in the next twelve months, they weren’t exactly predicting home run returns. So where is the enthusiasm? Maybe the Fed’s flood of liquidity and low rates have led people to temper their expectations. Perhaps it’s the fact that investors have been burned twice in the past 15 years or that many investors have only recently surpassed previous peaks in their net worth. Maybe it’s the public’s exhaustion with political bickering or its distrust of the market and its major players. Whatever the reason, the euphoria of past bull markets doesn’t appear to be present.

Frank Martin, founder of Martin Capital Management, had an interesting take on the subdued sentiment: “The market crowd’s message is particularly insidious today because it lacks the tympanic rumble of a typical bubble. It is a herd of the needy, not the greedy. The effect is the same, but without the telltale clamor.”

David Einhorn, manager of Greenlight capital, noted the lack of enthusiasm in his Q1 letter to investors: “We are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it. In our view the current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm.”

Despite their apparent lack of enthusiasm, average investors’ attitude toward the market does not seem to coincide with the level of risk they are taking in their portfolios. Russ Koesterich had a nice article this week showing investors exposure to risk assets such as stocks, corporate bonds, and mutual funds is at its highest level since the third quarter of 2000. Retail brokers have been reporting large increases in trading volume and TD Ameritrade revealed that investors’ allocation to cash at is at its lowest level since September 2007. Finally, margin debt has exploded in the past year and as a percentage of GDP is basically at the same level it reached at its peaks in 1999 and 2007.

Tech stocks were all the rage in the late ‘90’s and housing was the topic du jour before the financial crisis in 2008. No single sector or asset class dominates the headlines today but there is a noticeable clamor for yield. For months advisors profiled in Barron’s have touted their ability to put together a portfolio generating yield via REITs, MLPs, high yielding bonds, and dividend paying stocks. Not exactly something an investor is going to brag about at cocktail parties and backyard BBQs.

In his last quarterly letter Jeremy Grantham predicted the US market would work its way 20-30% higher, with international and emerging markets performing even better. Maybe that would bring the real animal spirits back into the public. Do we need to see the euphoria before the market could drop to lower valuations? Does the lack of current enthusiasm indicate that stocks have more room to run? I have no clue in the short run but the mismatch between investors risk exposure and their attitude towards the market is interesting.