Investors Haven't Been This Optimistic Since The Peak Of The Dotcom Bubble

So much for buy low, sell high.

As US stock benchmarks smashed through one record high after the next this year, bank CEOs and celebrated fund managers have responded to their performance with trepidation. Valuations are out of whack, they’ve said, and the market is running out of excuses to keep the party going. Whether the Trump administration can get tax reform passed by year’s end remains to be seen. And the Federal Reserve has said it will soon begin unwinding its massive balance sheet. Meanwhile, the European Central Bank is rapidly running out of bonds to buy.

In the US, investors have been yanking money from the biggest market-tracking ETFs while global central banks have purchased trillions in dollars of assets. Undergirding all of this is the fact that gains are increasingly driven by a small concentration of mega-cap stocks.

And while investors don’t appear to be too concerned with the situation in North Korea, the US, China and the UN Security Council are preparing to tighten the noose of international sanctions against both the country's economy and its government, something that will only make Kim Jong Un more desperate.

While the arguments for caution are almost too numerous to count, the precarious state of the market has been lost on the average investor, according to a survey from Wells Fargo and Gallup. The survey, which is used to calculate the Wells Fargo/Gallup Investor and Retirement Optimism Index, shows that investors haven’t been this optimistic about the stock market in 17 years – since September 2000, which was coincidentally the peak of the dot-com boom.

The index, after rising in every quarter since the start of 2016, leveled off in the second quarter at +124, before rising to its current +138 in the third quarter.

The latest boost in optimism pushed the index almost 100 points higher than the +40 score measured in February 2016. The 98-point hike over the past 18 months is the largest increase in the 20-year history of the index, excluding rebounds that have followed bouts of pessimism.

The survey was conducted between July 28 and Aug. 6, and includes US investors with $10,000 or more invested in stocks, bonds or mutual funds. The seven items that constitute the index include three on personal finances (meeting long-term investment goals, meeting short-term investment goals and maintaining income) and four on the economy (economic growth, the stock market, unemployment and inflation). As Gallup notes, the survey was being conducted as the Dow Jones Industrial Average surpassed the 22,000-point milestone for the first time.

Remember this guy?

We can extrapolate from this that investors, like gamblers, believe success begets more success, upside begets more upside. In short, thanks to of momentum, because the market is at a record high today, it will be at an even higher high tomorrow.

“Sixty-one percent of investors now say it is a good time to invest in the stock market, up from 53% two years ago. Among those saying it's a good time to invest, the main reason is their belief that the market will continue to increase, mentioned by 47%. Eighteen percent say stocks are a better investment than the alternatives, and 17% see stock market volatility as a buying opportunity.”

However, more than half of respondents who said they wouldn’t buy now did so for the same reason:

“Among the 37% who do not think it is a good time to put money into stocks, 52% say the main reason is worry about a market correction.”

Optimism among retirees has climbed more dramatically than their working peers. In the first-quarter survey, the index was similar among retirees (+124) and nonretirees (+127). Now retirees are considerably more optimistic than nonretirees, at +158 versus +130. This shift can largely be attributed to their views on the economy: while working Americans’ expectations for growth were steady, retirees’ expectations have climbed considerably.

In summary, two-thirds of investors are optimistic that the stock market will continue to climb, while a quarter are now very optimistic. While we wonder how large a shakeout would be needed to change their minds, at least we can put an end to the recurring soundbites that there is "money on the sidelines", that the market is "climbing a wall of worry" and that retail is oh so skeptical of stocks.