To wit:

"Consumer confidence in higher stock prices in the next year remains at the highest since 2018, following the 2017 "Trump" tax cuts." (Note: this survey was completed before the Presidential Election.)

We also discussed households' allocations to equities, which, according to Federal Reserve data, have reached the highest levels on record.

In that article, we discussed the risk associated with high levels of investor exuberance.

"Risk isn't always what it seems. When the market feels the safest, that's often when it's often the riskiest. Think about it — when everything is going smoothly, people tend to take more risks, which can lead to market bubbles and crashes."

However, it is crucial to understand that "exuberance" is a necessary ingredient for pushing asset prices higher. This is why "sellers live higher, and buyers live lower." In every market and asset class, the price is determined by supply and demand. If there are more buyers than sellers, then prices rise, and vice-versa. While economic, geopolitical, or financial data points may temporarily affect and shift the balance between those wanting to buy or sell, in the end, the price is solely determined by asset flows.

Currently, a liquidity surge supports investor exuberance, marked by enthusiastic buying and excessive risk-taking. As we will discuss, such activity often precedes significant market corrections. While optimism can drive short-term gains, history shows that when sentiment runs too hot, and valuations detach from fundamentals, such leaves the markets vulnerable to declines.

The Psychology of Market Euphoria

Nobel Prize-winning economist Robert Shiller famously coined "irrational exuberance" to describe situations where speculative behavior pushes asset prices far above intrinsic values. Shiller's research shows that emotional narratives and herd behavior dominate in bull markets, fueling market increases that eventually revert under the weight of reality. He warned that "markets can stay irrational longer than you can stay solvent," reflecting how unpredictable and dangerous excessive optimism can become.

Similarly, Jeremy Grantham, a seasoned investor known for identifying bubbles, recently described the post-2009 bull market as an "epic bubble" driven by speculative behavior and extreme overvaluation. Unsurprisingly, as market prices increase, exuberance builds, and investors rationalize overvaluation by believing that "this time is different."