Feb 6, 2024
The S&P 500 surged by 24% in 2023 and is off to a good start in 2024. Year to date, the benchmark index has edged up by an additional 4.3%. Meanwhile, the VIX index, often dubbed the “Fear Index,” remains notably low.
However, market expert Robert Prechter does not share this prevailing sense of optimism. In a recent interview with Fox Business, he expressed his concerns, warning that the future may not be all sunshine and rainbows.
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“Extreme optimism has consequences. The last time we saw extreme optimism was late 2021, and that's when the broad market topped out and the blue-chip index temporarily topped out,” he noted.
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Right now, Prechter believes that the behavior of mutual fund managers is indicative of a period of extreme optimism.
“Two percent cash in mutual funds,” he emphasized, referring to the proportion of mutual funds’ total assets that are held in cash. “Now that is extremely low. It used to be when you got to 4% it was a bearish signal, and now we’re at half that.”
According to Prechter, such a minimal cash reserve is perilous. It suggests that mutual fund managers “can’t imagine” a market downturn that would offer a more favorable buying opportunity, prompting them to stay fully invested.
Investors might want to pay attention to Prechter's insights. After all, the founder of forecasting firm Elliott Wave International is famous for predicting the 1987 stock market crash.
‘Thinnest market’ on the upside
While the major stock market indices paint a rosy picture, Prechter warns of the subtleties obscured by these headline numbers.
He points out that the market’s gains are heavily skewed, driven predominantly by a handful of prominent names.
“The NASDAQ 100 is at a new all time high, but the NASDAQ Composite is not. So even within the tech sector — which everybody loves — the leadership is extremely narrow,” he explained.
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Turning his attention to the Russell 2000 Index, a broader market index comprising 2,000 small-cap companies, Prechter noted, “It's still down 20% from its high in 2021.”
He described the current market as the “thinnest” he has witnessed on the upside. While acknowledging that it could climb higher in the short term, he firmly stated, “I'm frankly just not interested in being long stocks right now.”
Earning a return with ‘no risk’ while ‘doing nothing’
Prechter's assessment of the current market climate is unequivocal — he advocates for safety.
He underscored this stance by pointing to the bond market, particularly the narrow yield spread between junk bonds and 90-day Treasury bills, as a sign of unwarranted optimism.
“Junk bonds, yielding only 2% more than 90 day treasury bills, which is another indication of a ridiculous optimism. I'd say you're in a situation where safety should be paramount,” he advised.
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So, where should investors look?
According to Prechter, “You can get almost five and a half percent for doing nothing and no risk. And there's so much risk in the stock market right now.”
Prechter may have been alluding to high-yield savings accounts. These accounts, provided by banks and credit unions, can offer attractive rates exceeding 5%, enabling investors to grow their cash reserves safely.
Savings accounts at most banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank. Those held at most credit unions are similarly insured by the National Credit Union Administration (NCUA).
In addition to savings accounts, investors nowadays also have the opportunity to earn substantial returns through money market accounts. These are deposit accounts that offer interest rates influenced by the prevailing rates in the money markets. These accounts are also protected if the financial institution is federally insured and can provide yields of over 5%.
Still, Prechter hasn’t entirely written off stocks — the market veteran is just waiting for the dip. “I think we're going to have a great buying opportunity whenever the market decides to give us one,” he suggested.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
