What Cars and Stocks Have In Common These Days

Michael Lombardi: Mom and pop investors bought lots of stocks last year as the key stock indices reached all-time highs. By late 2013, the fear of “missing out” on future stock market gains was back. Sound similar to 2007?

According to the Investment Company Institute, investors bought $160.9 billion worth of stock mutual funds in 2013. This was the first time since 2007 when these types of mutual funds saw inflows. In 2007, investors bought $73.9 billion worth of long-term stock mutual funds. (Source: Investment Company Institute web site, last accessed February 11, 2014.)

And stock advisors are outright optimistic. For example, Birinyi Associates Inc.’s Laszlo Birinyi, a well-known money manager, is saying that the S&P 500 will hit 1,900 by the next quarter (it’s at 1,820 now). His argument: don’t bet against stocks because they have too much momentum. (Source:BusinessWeek, February 10, 2014.) Back in 2007, we heard many bullish calls for higher stock prices; we heard calls from well-known stock advisors saying key stock indices like the Dow Jones Industrial Average would hit 20,000 (seven years later, it’s stuck at 16,000).

One way I gauge optimism and complacency in the marketplace is by accessing auto sales. Car sales in the U.S. economy have reached 2007 levels again, and there are predictions that they will grow even further. After almost going bankrupt, the automakers are making all kinds of money again, paying their people very well once more. The new CEO of General Motors Company (NYSE:GM) will be paid $14.4 million in 2014, 60% more than what the previous CEO of the company made. (Source: Reuters, February 10, 2014.) GM went bankrupt and was bailed out by the government, but it looks like all is forgotten again.

In December of 2013, as the key stock indices reached their highest levels, margin debt on the New York Stock Exchange (NYSE) reached its all-time high, as well. It stood at $444.9 billion. Back in July 2007, when key stock indices were also reaching all-time highs, margin debt reached $381 billion. (Source: New York Stock Exchange web site, last accessed February 11, 2014.) Margin debt—the amount of money people are borrowing to buy stocks—is higher today than it was in 2007…and we know what happened to key stock indices after 2007.

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