For an equity bull market, overconfidence can be the kiss of death.
This can be seen in a cycle that's played out repeatedly throughout history. At a certain point during an extended stock rally, investors get cocky and continue to pile head-first into positions with little regard for risks. Then the market faces a drastic reckoning, leaving those traders wishing they'd been more careful.
Simply put, when investors start to feel invincible, bad things happen. To Morgan Stanley, this so-called "euphoria" stage marks the beginning of the end of a bull market. And guess what? That's where we are right now.
"Financial conditions will tighten this year, and we can no longer say that investor sentiment and positioning is muted," Mike Wilson, Morgan Stanley's chief US equity strategist, wrote in a client note. "In fact, there are now signs we have entered into the 'euphoria' stage of this bull market."
It's a continuation of comments Wilson made in mid-December, when he asserted that "no cyclical bull market has ever ended without some excitement from investors."
Rather than continue to chase new highs in the US, Wilson recommends looking for opportunities overseas.
"After a long period of US dominance, we believe both Europe and Japan can outperform the US in 2018 and beyond due to the meaningfully lower valuations and potentially faster earnings growth.These countries are much earlier in their economic recoveries from the financial crisis."
Source: Bloomberg Pro Terminal
Trader Bozhidar Arabadzhiev
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