MW Your retirement savings are at risk in a clearly insane stock market

By Brett Arends

Fund managers admit they're buying overvalued stocks

It's one thing when the chairman of the Federal Reserve accuses Wall Street of "irrational exuberance," as Alan Greenspan once did.

It's another thing when Wall Street pros are saying it about themselves.

But that's the insane situation we're in right now - yet another development that will test the resolve of many long-term investors.

An astonishing 89% of the world's top fund managers now say that they think that the skyrocketing U.S. stock market, which has risen by 50% in just two years, is overvalued.

That's the highest percentage who are warning about valuations on Wall Street since the tail end of the great millennium bubble 24 years ago.

Yet a large majority of the same professional investors nonetheless report that they are heavily overinvested in stocks, especially those overvalued U.S. stocks.

A net 35% of fund managers told BofA Securities that they were "overweight" stocks in general, meaning they held even higher levels than their benchmarks would suggest, with U.S. markets their favorite region by a clear margin.

And they have cut the cash levels in their portfolios to 3.5%, the lowest levels since 2010.

Confused? You are not alone. But welcome to the world of professional investment managers, where FOMO, or fear of missing out, leads to FOLC, or fear of losing clients. And this is far greater than FOLM, or fear of losing money.

The findings come from the latest BofA Securities survey of global fund managers. (This is the same survey I use for my semiregular Pariah Capital portfolios.) The latest survey polled 168 institutional investment managers, chief investment officers and asset allocators, who handle a total of $401 billion in assets.

The mind boggles. What in the current situation is causing professional investors to throw caution to the winds and buy stocks at prices that even they admit are crazy? Is it the peaceful global outlook? The calm, stable political situation? The robust, healthy status of the Western alliance? The overwhelming evidence that the government in Washington, D.C., is in the hands of mature, stable geniuses?

The best that can be said is that by some of these metrics, fund managers are slightly less exuberant than they were in December. And last month they warmed up slightly toward European stocks - just in time for the Ukraine crisis to boil over again, naturally.

It is hardly surprising that investors are looking at current U.S. stock prices with alarm. The S&P 500 SPX now trades at nearly 23 times forecast per-share earnings for the next 12 months. That's the most expensive rating for the index since 2001, other than a brief spell in 2020. The dividend yield on the index, at 1.3%, is the lowest since the peak of the great bubble in 2000.

U.S. stock indexes are also expensive by the standards of history when measured according to various other guides, such as the so-called Buffett indicator, which compares stock values with annual gross domestic product; the cyclically adjusted or Shiller price-to-earnings ratio, which compares stock prices with average per-share earnings of the past 10 years; or Tobin's Q, which compares stock valuations with the cost of replacing companies' assets. These various indicators are named after the investment gurus who popularized them: Berkshire Hathaway $(BRK.B)$ Chair Warren Buffett and Nobel Prize-winning economists Robert Shiller and James Tobin.

None of these indicators alone proves the market is in a dangerous bubble. Even when they all occur at the same time, it doesn't prove it. But combined with this almost blind exuberance among professional fund managers, it is enough to give you pause.

It speaks volumes that while fund managers are telling their clients that "God is in his heaven, and all's right with the world," the price of gold (GC00) - disaster insurance for thousands of years - has never been higher. Gold has risen 12% just since Jan. 1 and is near $3,000 an ounce, an all-time record.

Veteran Wall Street money manager Howard Marks, who anticipated the crash that followed 2000, came close to calling the current market a bubble a few weeks ago.

Meanwhile, it's ironic that investors have slashed their cash balances. Cash has rarely been this appealing in recent years, with Treasury bills and short-term Treasury bonds paying 4% interest or better. Oh, and Buffett has stockpiled a record $325 billion in cash in his Berkshire Hathaway investment conglomerate.

That last development might be mere coincidence, of course. Then again, it might not.

-Brett Arends

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 20, 2025 23:13 ET (04:13 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.