Overall, investors have about 68% of their investment allocation in stocks. This is the same level as 2007 and historically near the top asset allocation for equities.
Should the economy continue to show signs of further weakness or if the investing public loses faith that the Federal Reserve can continue to inflate equity markets, investors will likely reduce their stock exposure.
With margin debt-levels and valuations near historical highs, this could cause an unexpected rush to the exits caused by margin calls where substantial price declines occur. A quick and possibly violent short-term correction of 10-20% or more is not out of the question. Think October 1987, the years 2000 and 2008.
No one really knows what will happen next, our staff included. After all, we are in the greatest monetary experiment of all-time.
Stocks could continue to go higher, approaching and even possibly eclipsing valuations set during the dot com bubble. Or they could crash back to reality as they have every other time when valuations become this inflated.
Remember that Warren Buffett did not get rich by buying stocks at market highs. Warren Buffett and other investing legends got rich by raising cash when stocks were at historically high valuations, so they could buy from desperate investors after market corrections when stocks were cheap and everyone else was selling.
Our valuation models continue to suggest that investors should consider lowering their allocation to the U.S. Stock Market based on current valuations. Continuing to invest the same allocation to stocks at current levels is the opposite of what successful long-term investors have done.