When my sister tried to open an investment account at a major Canadian bank in early January, she was told she would face at least a two-week wait. "Everyone is opening accounts to trade pot stocks," her branch manager said.
It's not just my sister's bank: Whenever I log on to my own investment account at another big Canadian financial institution, I see a message warning me that response times will be slow because of "unprecedented demand" from clients for investment services of all types.
I can't remember so much excitement among investors since the late 1990s. Back then, newly minted dot-com shares with no record of sales or earnings were soaring to the moon and beyond. North American speculators were convinced that only chumps settled for anything less than doubling their money.
Today's mood is getting just as giddy—and this time the euphoria is worldwide and all-embracing. In the United States, stock market optimists outnumber pessimists by the greatest margin in a generation, according to the market sentiment survey conducted by Investors Intelligence. In the Asia-Pacific region, stock prices have shot upward by 32% over the past year. In Europe, equity markets have also surged to double-digit gains, while other key asset prices look even frothier. One case in point: The government of Greece can now borrow money in the bond market for two years at lower rates than its counterpart in Washington can. Is Greece—a country with an economy that nearly collapsed just three years ago—really a better bet for borrowers than the gigantic U.S. powerhouse? Go figure.
Optimists will tell you this outburst of euphoria is a rational reaction to an increasingly sunny outlook for the global economy. They can make a good case. For the first time since the financial crisis a decade ago, all major regions are growing. At long last, the shadow of the great recession is lifting.
But, the pessimists respond, isn't a lot of happy juice already built into share prices? Consider the most robust measures of stock valuation, like the Shiller price-to-earnings ratio, which compares share prices to the long-run ability of companies to produce profits. The Shiller P/E indicates U.S. stocks are now at their second-most expensive level in history. Stock valuations are still short of the levels reached during the dot-com bubble. However, shares are pricier, in terms of underlying earnings, than they were in 1929, just before the Depression.
You don't have to look far to see manic optimism at work closer to home. In Canada, marijuana stocks are rocketing upward, while cryptocurrencies are attracting a new and rabid fan base. Maybe we'll all get high while making fortunes in bitcoin, but you don't have to be an old fuddy-dud like me to worry about how this will end.
The key is how to protect yourself against disappointment while also avoiding regret if the optimists are right. Let me offer two thoughts.
The first is to focus on generating the returns you need to hit your financial goals, not on how other people happen to be doing. Nothing is quite so disturbing as seeing other people get rich. But dwelling on stories about folks who made millions by betting on a pot stock or bitcoin is likely to push you into some of the loonier corners of the market at the worst possible time. Far better to stay focused on stocks of steady, reliable companies that actually make money.
The second tip is to remember that markets move in cycles. This bull market is already one of the longest in history, which by itself means nothing—overvalued markets can go on being overvalued for a long, long time. However, pricey markets always eventually come back to Earth. Reassure yourself that there will be other—and probably better—buying opportunities to come.
In my own case, I've adopted a policy of moving a set amount of money each month out of stocks and into GICs and the like. I don't claim this is the perfect strategy, but when everybody is pushing to get into the market, it's usually time to start sidling away.
Ian McGugan