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The stock market, until the last couple of days, has been hitting record after record this year.
The Dow Jones Industrial Average DJIA, +0.29% topped 24,000 with little fanfare, and the S&P 500 SPX, +0.29% sits comfortably above 2,600, easily topping Wall Street strategists’ targets for the year.
But along with that near-effortless rise have emerged pockets of euphoria, mostly in niche markets, although there are some signs of froth in the market as a whole.
Euphoria—defined as a feeling of happiness, confidence or well-being—entered the market lexicon through the late Sir John Templeton’s famous saying, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Euphoria often precedes mania, which is wilder and more intense.
For months we’ve had euphoria in the FAANG stocks (Facebook FB, +2.32% Amazon AMZN, +0.65% Apple AAPL, +0.18% Netflix NFLX, -0.05% and Alphabet, parent of Google GOOG, +1.23% GOOGL, +1.15% ), as well as other high-momentum tech stocks like Microsoft MSFT, -0.35% Nvidia NVDA, +1.44% and Tesla TSLA, -0.64% We have a full-blown mania going on in bitcoin BTCUSD, +4.77% and other cryptocurrencies. I’ll take the easy one first.
I’ve never written about bitcoin in this column because, well, it just wasn’t important enough in the great scheme of things. (It still isn’t—it represents only 2.4% of the $7.6 trillion in coins and bank notes in circulation.) Will cryptocurrencies or electronic cash replace bank notes at some point? Quite possibly, and bitcoin is very innovative.
But history shows early innovators often aren’t the ultimate winners of the technological disruption they cause, and bitcoin is as likely to dominate global currencies as Tesla is to prevail in electric, autonomous cars against Volkswagen, Toyota and General Motors.
• Bitcoin has soared over 10,000% since 2013, and 1,733% in the 12 months ending Nov. 30, giving it a market value of around $170 billion.
• The Winklevoss twins (you might remember them with a pompous, patronizing Larry Summers in “The Social Network”) may have lost out on tons of Facebook money, but they put $11 million of their $65 million settlement into bitcoin. It’s now worth $1 billion, making them the first bitcoin billionaires.
• More than 100 hedge funds are dedicated to cryptocurrencies, and Kardashian wannabe Paris Hilton and boxing champ Floyd Mayweather have endorsed initial coin offerings. That’s right: C-list celebrities hawking ICOs. Need I say more?
On the mere euphoria side, the FAANG stocks’ recent selloff has caused the Nasdaq Composite Index to fall only about 2%. But Facebook, Amazon and Alphabet have lost more than 5% of late, Netflix is down 8%, and Nvidia has slumped 13%.
Before the selloff, the S&P 500’s information technology sector had surged 39% in 2017 (the Technology Select Sector SPDR ETF XLK, +0.62% lagged behind), four of the five FAANGs had gained at least 50% for the year, and the FAANGs had a total market capitalization of $2.8 trillion, 10% of the value of the entire U.S. stock market. At one point they accounted for 20% of the S&P 500’s total return for 2017. Take a deep breath and think about that.
The FAANG stocks sold off big in June—and I was premature in saying they’d peaked. They came roaring back, in some cases hitting new highs. This could be another correction that sets them up for even bigger things in the future, or it could be the start of a rotation into other strong sectors like energy and financial stocks, which also have been market leaders.
Overall, stocks are trading at very lofty valuations, and cash holdings for Merrill Lynch clients are below where they were in 2007. Margin debt is at a record. Institutional sentiment indicators tracked by Barron’s are wildly bullish.
So, what else is new? These indicators have been flashing red for months, and the market has continued to rise. We also haven’t seen the usual signs of mania like stock tips from Uber drivers, shoeshine men, etc.
That’s why I think except for manias like bitcoin and the FAANGs, we’re in the early stages of stock-market euphoria. The best—or worst—is yet to come.
Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.