The post-election rally has taken stock markets to all-time highs. Readers know I am not a fan of making stock-market predictions, but the recent gains do raise some interesting questions.
Rather than offer up a silly and very likely wrong forecast, I prefer to share instead some thoughts that you might have overlooked. I hope you will find them useful.
• Sentiment: Has gotten frothy as the market has run up. One of the more interesting ways to track sentiment is to use the Wall Street Journal as a reference guide. Stock-market researcher Laszlo Birinyi notes that when new market highs are consigned to page C4 or otherwise buried in the back pages, it is still early in the cycle. By the time it makes it to the front page, we might be getting ahead of ourselves.
After months of back-of-the-paper articles, here is Thursday's front-page Journal headline: "Postelection Rally Lifts Stocks to New Heights." The A1 coverage suggests that more investors are aware of -- and participating in -- the market rally. That might imply that a short-term retreat is due.
• Valuations are elevated: Markets are overvalued relative to historical averages. This may be true, but it misstates an important fact. Markets are rarely fairly valued. When stocks are undervalued, people can be too nervous to put capital to work; when they are expensive, they are reluctant to overpay.