No Madness and No Crowds

Charles Mackay’s book Extraordinary Popular Delusions and the Madness of Crowds, chronicles some of history’s greatest financial manias, including the South Sea bubble and the Dutch tulip mania, among many others. As the stock market continues to make new highs, discussion of a market bubble has been capturing many of the recent headlines. For those that suggest this is the case, they may need to refresh themselves with Mackay’s book, which highlights the “mania” phase – a phase that we have yet to encounter. Per Guggenheim Partners, “the Nasdaq, for instance, saw an 85 percent gain between September 30th of 1999 and March 10th of 2000.”1There has been so much discussion of bubbles, it seems that investors, who had been whipsawed as recently as five years ago, are almost predisposed to the position that a bubble is waiting to pop in their face at any moment. Eddy Elfenbein of Crossing Wall Street recently quoted, “A bubble is a bull market in which you don’t have a position.” The stock market is not a single entity and “there will always be gems that the crowd overlooks.” 2 Furthermore, Ms. Yellen “sees no case for a bubble, and hinted strongly that she is going to use all the Fed’s powers to ensure a robust recovery.” 3 She added that “if you look at traditional valuation measures” we are not in bubble-like territory. 4 Some pundits have pointed to the fact that individual investors are returning to the equity market, which may be a cause for concern. Per Strategas, if we put these equity inflows into context, “the magnitude of the inflows in the last 10 months is dwarfed by the redemptions from these funds in the prior 5 years.” 5 In fact, “an empirical study of the data suggests that the individual investor may have an over-exposure not to stocks, but to bond funds” that he’s been using as a proxy for cash. Although the data is hard to find, there may be some evidence to suggest that high net worth investors may also be relying too heavily on private equity investments rather than publicly-traded stocks for their target equity allocations.” 6 In short, the “crowds” have yet to form in the public equity markets.

As we peruse the landscape, there are a number of signs suggesting that the wind remains at the back of the stock market. In addition to reasonable multiples for the broad market, market strategist Dave Rosenberg highlights that “the big sleeper here could well be the economic and revenue boost from the fracking revolution.” 7 This may allow the U.S. “to emerge with ‘twin surpluses’ on the fiscal and current account fronts within the next five years, which could mean “a total re-rating of U.S. asset prices.” 8 James Paulsen of Wells Capital Management also proposes another factor that may provide a lift as we head into 2014. Paulsen states that it appears “for the first time in this recovery, monetary velocity, the rate at which the money supply turns over, is finally starting to turn up.” 9 In every economic recovery since World War II, money velocity has turned up “several years into the recovery like we are today.” 10 He adds that we have yet to cross the halfway point in this recovery, which he thinks could last ten years. Ten years seems to be just about the time to “reestablish confidence enough that people start doing stupid things again and get themselves in trouble.” 11 The recency effect and the losses incurred from 2008 are scars that take years to heal. If we look ahead, the skies look much clearer than others are suggesting.

Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has over 25 years of experience in the financial industry. Ms. Rosenau focuses on strategic and tactical asset allocation, investment planning strategies and equity portfolio management strategies. As a result of her extensive knowledge and expertise in the equity markets, she was named the Equity Market Strategist for HighTower. In addition to this role, she performs due diligence on the firm's third party research relationships and continues to add, monitor, and prune research providers where necessary. Prior to joining HighTower she worked for various sell-side firms beginning her tenure at Wertheim & Co./Schroders Plc.

Ms. Rosenau was recently ranked #14 in Barron's 2013 Top 100 Women Financial Advisors. She was also chosen for Barron's 2013 Top 1,000 Advisors list, ranking #42 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses.

The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC, a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.

This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower Advisors, LLC or any of its affiliates. In preparing these materials, we have relied upon and assumed without independent verifications, the accuracy and completeness of all information available from public and internal sources. HighTower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them.

This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. Carefully consider investment objectives, risk factors and charges and expenses before investing.

1 Guggenheim Partners. Party Like it’s 1999. November 6, 2013.

2 Eddy Elfenbein. CWS Market Review. November 15, 2013.

3 David Rosenberg. Gluskinsheff. Breakfast with Dave. November 15, 2013.

4 Jon Hilsenrath. Wall Street Journal. November 15, 2013.

5 Strategas. Market Catechisms. November 15, 2013.

6 Ibid.

7 David Rosenberg. Gluskin Sheff Research. Breakfast with Dave. November 13, 2013.

8 Ibid.

9 Tom Keene. Bloomberg Briefs. Interview with James Paulsen. November 13, 2013.

10 Ibid.

11 Ibid.

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