Banks and other financial stocks have soared this year and have helped lift the broader market.
Shares of top Internet companies are surging too. And while some of them appear to be reasonably valued -- if not necessarily cheap -- the fact that the dot-coms are on the march again is clearly a sign that investors have regained their appetite for riskier assets.
That's not all. Stocks in emerging markets like Brazil, China and India have fared even better than their U.S. counterparts. And commodities are once again becoming uh, hot commodities, now that the dollar is getting dumped.
So much for the notion that investors were scared witless by the near collapse of the financial system last fall and earlier this year. Lehman who? AIG what?
"What we thought were powerful and painful investment lessons on the dangers of taking risk too casually turned out to be less memorable than we expected. Risk-taking has come roaring back," wrote Jeremy Grantham, chief investment strategist with money management firm GMO and an influential value investor, in a note to clients published Tuesday.
It's a good idea to be somewhat skeptical of the rally. It does seem like stocks have come too far too fast.
"The forces of herding and momentum are also helping to push prices up, with the market apparently quite unrepentant of recent crimes and willing to be silly once again," Grantham wrote.
In addition, the easy money may have already been made. Momentum is fickle and anyone rushing in to buy stocks that have already doubled and tripled on the hopes of even bigger gains ahead may be fooling themselves.
"Ten months ago everybody was running away from risk. That was the time it made the most sense to embrace it," said Mark Oelschlager, a fund manager with Oak Associates, an Akron, Ohio-based investment firm focusing on growth stocks. "Now that people are seeking more risk, you could make the argument that this should be a red flag."
Oelschlager said that he isn't predicting a big crash for stocks in the coming months. But he said that investors would be wise to take some money off the table from stocks that have already enjoyed big gains.
He added that with interest rates now at zero for almost a year, it looks like the Federal Reserve is encouraging people to take more risks. That could get the economy get back on track in the short-term, but also could create more significant long-term problems.
"The Fed does seem to be intent on reflating the economy. That's helping to restart activity but it sows the seeds for a possible replay of some sort of bubble," Oelschlager said.
0:00/3:11Average Bob sees no jobsStill, investors shouldn't dismiss what's going on in the market either. After all, there is evidence that the economy is really, seriously, we're not pulling your leg or making this up improving.
Housing prices appear to be stabilizing. According to the widely-watched S&P Case-Shiller Home Price Index, prices in 20 major markets were up in August on a monthly basis for the fourth straight month.
And even though prices are still down 11.3% from a year ago, that is the smallest year-over-year decline since January 2008.
What's more, economists are predicting that the nation's gross domestic product (GDP) rose 3.2% on an annualized basis in the third quarter. That would be the strongest level of growth in two years. The official number comes out Thursday.
Of course, it's debatable whether this growth is sustainable. It may be merely the byproduct of government stimulus and Cash for Clunkers and not a real sign of a healthy long-term recovery.
"The key for advisors and their clients is determining whether such growth is a head-fake or the beginning of sustainable organic growth. I continue to find myself on the head-fake side of this argument," wrote Bob Andres, a consultant for PMC, the investment advisory unit of money manager Envestnet, in a note to clients last week.
Along those lines, there are no signs of improvement just yet in the one part of the economy that matters most to people: the labor market.
The national unemployment rate is expected to hit 10% before long. And job fears appear to be outweighing any good news about the housing market and enthusiasm on Wall Street. Consumer confidence took an unexpected drop in October according to a report from the Conference Board Tuesday.
While confidence is admittedly a touchy-feely figure that doesn't always accurately predict future consumer spending, it is telling that consumers felt less confident about the economy considering the recent market rally. Confidence does tend to often follow the direction of stocks.
In this case though, consumers might be right to doubt the rebound in stocks. Grantham, who like Oelschlager is not predicting a return to the market lows of last March, wrote that he does think a "painful" drop of about 15% to 20% from current levels is probably in the cards.
His reasoning is that there will be more "disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems."
That's why he added that he thinks investors need to steer clear of riskier stocks and gravitate more towards quality stocks, i.e. companies with strong balance sheets and a history of stable returns.
Grantham didn't mention specific stocks, but it's worth pointing out that the firm's five largest holdings as of mid-year were Microsoft (MSFT, Fortune 500), Johnson & Johnson (JNJ, Fortune 500), Wal-Mart (WMT, Fortune 500), Pfizer (PFE, Fortune 500) and Coca-Cola (KO, Fortune 500), according to data from FactSet Research.
Andres is even more blunt. He wrote that unless economic fundamentals show meaningful improvement, then stocks are going to eventually head lower again.
"Investor risk is increasing rapidly and is associated with growing expectations that earnings and the economy are about to reverse the missteps of the last two years," he wrote. "Extreme movements in either direction usually do not have a long shelf life and we all know that the ride up is more fun than the ride down."
Talkback: Have companies, investors and consumers learned any lessons from last year's crash? Or are businesses and individuals taking on too much financial risk again? Share your comments below.
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