As the markets rise, and keep rising, there is euphoria all around. Everyone likes it when asset prices go up. The total wealth in the economy goes up, based on extrapolation from asset prices determined by a lot of liquidity chasing the floating stock available for sale.
Are the markets overheated? In some circles it is considered bad form to ask such things – "Shubh shubh bolo" is what the human mind prefers. And who wants to be left out of the party? It looks damn silly when others are making money and you are watching from the sidelines. Anyway, the prices are going up, so I will find another buyer who will buy the stuff off me at a higher price. It is called the "greater fool theory". To answer the question as to whether the markets are overheated, I don't know. Tomorrow morning, if it has gone up, then no; if it crashes, then of course. These things are always better commented upon on hindsight.
One used to wonder why asset prices were not going up when the Fed started reducing interest rates and kept it low, after the 2008 meltdown. Worldwide, liquidity went up, and for years, we have had money sloshing around. But asset prices never really rose too much, at least till recently. In the last one year, asset prices across the world have gone up tremendously, including Indian stocks. The one exception in India seems to be Real Estate, where prices have stagnated for the last three years, but that is for a different set of reasons. Bond prices went up too, for a long time, as a reaction to falling yields. Is the 2008 "monetary easing" finally culminating in this price rise? In that case, what happens when the cycle reverses?
Long term bond yields in India have already started going up. The yields on the 10 year GSecs have gone from 6.4 percent to 7.2 percent in the last 6 months. The Fed may probably start hiking rates as well. Is this the beginning of the reversal of the cycle?
If you are into equities, it is good to keep a close watch on the markets. In other words, continue to ride the wave, but be prepared to sell your stock when you feel the market has started to move the other way. When that will happen, one can't say, one just has to keep a watch. The best thing to do then, would be to invest in liquid funds, and wait.
And to those who say that "this time it is different, this is a sustainable long-term rally because it is aided by … (name your factors here)", it is good to read articles like the one below. This one talks about how the stock market overheated and then crashed, in Bombay, in 1865!
Link to article:
History always repeats itself, but men never learn, they make the same mistakes again and again. I, however, am smarter than the rest. I shall be able to figure out when the market is going to turn and exit all my positions before all the other morons out there figure it out. The trick is to take advantage of others' greed.
So say I. And so said all the rich Parsi worthies of Bombay in 1865 before their world came crashing down!
(posted to my blog on 29 December, 2017)