Have We Reached Peak Stock Market?

The stock market has been full-on raging bull since March 2009. Indeed, the S&P 500 bottomed-out at 682 in the depths of the great financial crash, but has since climbed to a record 2,415 as of this writing. Those who started their investing journey in the past eight years have only known markets to rise, but prices will eventually fall. Have we reached peak stock market? Perhaps some recent conversations that I overheard can offer some clues.

I work at a university, an environment in which young Canadians pay close attention to government policies, in particular the proposed decriminalization of marijuana. In anticipation of this change, one group of students invested in Canopy Growth Corp. (TSE: WEED), which is a producer and retailer of medical marijuana.

Canopy was a big hit with investors in 2016, posting returns in excess of 200 percent. Of course, these students got to the party a bit late in the year, capturing a 62 percent gain in November before the stock came down from its high to trade in and around $8 today (same as when they bought it).

Still, a 62 percent gain (albeit short-lived) on their first stock gave them the itch to start trading more frequently and now they own shares in various other fads, including Horizons’ new medical marijuana ETF (HMMJ).

Been there, done that

While discussing this student-stock-picking adventure with a couple of colleagues, both in their early 40s, they revealed that they too fell victim to stock-market euphoria in their college days – but this time it was during the tech boom of the late 1990s.

One claimed he made enough money day trading tech stocks that he was able to pay his entire year’s tuition. The other colleague said he had to drop two classes because he spent more time trading stocks than he did studying. He actually considered dropping out of school to become a full-time day trader. Unfortunately, what seemed like easy money one year turned into disaster the next, as the tech bubble burst and they lost everything.

Funny enough, both talked at length about their big wins, but when I asked what happened they each sort of laughed and said, “well I lost it all on this one stock (Pets.com, anyone?) that I was sure was going to keep going up. If only I would’ve sold earlier!”

Peak Stock Market?

I can’t say for sure whether we’ve reached peak stock market or not. I know that markets move in cycles and we’re in the midst of an unusually long bull market. I do think stories like these can offer some hints as to whether the stock market is approaching bubble territory.

A bubble is characterized by rapid escalation of asset prices that is not driven by market fundamentals but instead propped-up by exuberant behaviour. When stock market euphoria makes its way to university dorms, the greater fool theory takes hold. That’s when investors buy stocks without any regard to their quality in hopes to sell them quickly to another investor (the greater fool) who is willing to pay an even higher price.

Eventually, as it did with the dot-com boom in the 90s, the bubble bursts and neophyte investors like our university friends end up going broke.

Final thoughts

This is not my prediction of a stock market crash. Rather, it’s an acknowledgement that the money made in the stock market over the past eight years has started to pique the interest of the novice retail investor.

These are the investors that don’t bat an eye about investing their house downpayment or wedding fund, even though they’ll need to access it in a year or two. They’ll day-trade with their student loan money in hopes to score a triple-bagger.

Nobody wants to see another 2008-style stock market meltdown, but a sharp correction of 20 percent might bring some much needed perspective to investors and present a nice buying opportunity for those of us with the patience and discipline to take advantage of it.