Investors Are Buying High, Yet Again

Photograph by Annie Engel/Cultura

Sell low, buy high. Wash, rinse, repeat.

Investors have indulged this predilection time and again—most recently piling into the stock market just ahead of collapses in 2008 and 2001. Now it seems as if everyone wants in big again, even as the Standard & Poor’s 500-stock index has rallied 150 percent from its lows, corporate profits and cash hoards are at record highs, and the Federal Reserve has expanded its balance sheet to nearly $4 trillion. Equity funds drew $26 billion in the week ended Sept. 18, breaking the previous record set six years ago, according to EPFR Global, which tracks investor flows. Domestic stock funds notably took in just under $17 billion of that total.

And with such timing: U.S. shares hit record highs on Wednesday, the last day of EPFR’s reporting period, after the Fed said it would hold off on tapering its bond purchases. The market is up 20 percent this year and has jumped by a third just since last summer, having gone without a correction since 2011. The tech-laden Nasdaq has risen 25 percent in 2013, visiting highs unseen since the starry eyed turn of the century.

In a show of “you buy/we sell,” companies are racing to go public. (Chrysler, anyone?) At least 200 companies are gearing for initial public offerings this year, the most since 2007. Meanwhile, in the interest of full and fair disclosure, buyout shops might want to re-brand as sellout shops, so eager have they been to cash out.

Similarly, some legendary pros say they are in no rush to join the recent buying stampede. “Stocks were very cheap five years ago, ridiculously cheap,” Warren Buffett last week said. “That’s been corrected. … We’re having a hard time finding things to buy.”

“Right now,” remarked Carl Icahn, “the market is giving you a false picture. The market tells you that you are doing well, but I don’t think a lot of companies are doing that well. They are taking advantage of very low interest rates. So, obviously, you don’t have to be a financial genius to understand if I can borrow at 3 percent or 4 percent and buy assets maybe my own stock that is yielding 9 percent, 10 percent, or 11 percent, I am going to make a lot of money. In one sense or another that is what is going on. … I do think at [the market’s price-to-earnings ratio] of 17 that you have to be pretty well hedged.”

“If you tell me quantitative easing is going to be removed over nine or 12 months,” said Stanley Druckenmiller, “that’s a big deal because it’s my belief that QE has subsidized all asset prices. And you remove that subsidization, the market will go down. … The minute you have this phony buying stop, [stocks] can go down on no volume and just reprice immediately.”

In the meantime, keep your eyes on the tidy sum of $1.4 trillion. That’s how much investors have crammed into bond funds from January 2009 to May 2013, according to Bank of America Merrill Lynch. In just the past four months, however, they have unwound $173 billion of that mega-trade—an enormous redemption but still just a sliver of $1.4 trillion.

How much of that unwind will make its way to equities, especially when the Fed’s taper starts in earnest? For the market—loved once again, after so long—it’s a question that could trump all others.

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