The Last Time Sentiment Hit These Levels Was a Huge Red Flag

I was reading through the December 5th, 1902 Wall St. Journal. I felt like I was reading today’s WSJ.

The article headline was The Timidity of Buyers.

Here’s an excerpt… the coming in of orders to buy small amounts of stocks by many different people is gradually increasing… it illustrates very well the continued disposition of the public to buy stocks because of the evidences of continued growth of business throughout the country (emphasis mine).

The economy was in the early stages of a mild recession. But people were starting to buy stocks again.

Today, we’re not in a mild recession. But since the financial crisis, we’ve been in a decade of timidity.

The financial crisis left a bad taste in a lot people’s mouths. That’s starting to change.

A recent piece from Bloomberg said its “looking like boom time in the world economy again.” The same piece reported that Goldman Sachs and Barclays are the most bullish since 2011.

Just like in 1902, people are feeling better about the economy.

As you can see from the chart below, consumer sentiment is at its highest level since 2004.

Source: Surveys of Consumers – University of Michigan

In the latest report, Surveys of Consumers Chief Economist Richard Curtin said…

In contrast to the media buzz about approaching cyclical peaks and an aging expansion, with the implication of greater uncertainty about future economic trends, consumers have voiced greater certainty about their expectations for income, employment, and inflation.

Inflation expectations have shown the smallest dispersion on record, and increased certainty about future income and job prospects has become a key factor that has supported discretionary purchases.

To be sure, caution is warranted given that the current expansion will soon be the second longest expansion since the mid-1800s (emphasis mine), as well as the potential for significant changes in tax policies and the new Fed leadership and Board members.

Interestingly, the data indicate that neither changes in fiscal nor monetary policies have yet had any noticeable impact on consumer expectations.

Here’s why this is important…

The average investor is always late to the game. The “smart” money has been in this boom since 2009.

It’s likely that the “smart” money will start taking profits by selling to the “dumb” money soon.

The last time sentiment hit these levels was a huge red flag. Three years later came The Great Recession.

As you can see from the chart above, after it peaked in 2004, it went into a downtrend until it bottomed in 2009.

A few short years after the headline in 1902 came The Panic of 1907. It was a short financial crisis.

But a swift and brutal one. It happened over a three-week period. The New York Stock Exchange dropped almost 50%.

There were runs on banks and trust companies. The famous one was the Knickerbocker Trust Company. It was New York’s third largest trust at the time.

Once it collapsed, fear spread throughout the market. Then JP Morgan stepped in with the funds needed to secure the banking system.

An interesting side note is that The Panic of 1907 was a catalyst that led Congress to create The Federal Reserve System.

Look… No one knows if the next crisis will happen tomorrow, three years or five years from now. But like I explained yesterday, you don’t want to follow the herd.

It doesn’t end well.

The sentiment of the herd is at its highest level in over ten years. It’s not easy to do something different from the crowd.

But it’s a good time to be cautious. It’s a good time to be picky about what you buy.