The stock market might not be at the point of irrational exuberance, but we might be at the point where caution is called for.
We know the statistics. The major U.S. stock indices have been hitting record highs. Gaming stocks, especially, have done well.
As of this writing and since January 1:
Nasdaq + 9.9 percent
Dow 30 + 4.7
S&P 500 + 5.7
Fantini Gaming Index + 8.8 percent
Since the U.S. election:
Nasdaq +13.9 percent
Dow +13
S&P +10.6
A number of individual stocks have jumped for company-specific reasons. Scientific Games is up 35 percent year-to-date and Everi 60 percent, arguably from depressed levels. Aristocrat is up 16.2 percent on strong business trends.
Among casino operators, Wynn is up around 13 percent and Las Vegas Sands 9, as their latest Macau properties have reopened and that market has recovered.
But the big jumps this year are in U.S. regional casino operators:
Pinnacle +33.8 percent
Penn National +33.6
Monarch +14.9
Eldorado +11.8
Golden Ent. +11.2
Boyd + 6.7
That outperformance is partly the strong performance of particular companies, partly optimism over business prospects and partly confidence that regional casino companies will remain disciplined in gaining efficiencies, reducing costs and avoiding marketing wars.
And the economic news supports optimism.
Consumer sentiment and employment are two of the most important economic indicators for the casino industry. Consumer confidence is at its highest level since 2000. The unemployment rate is at its best in a decade. Initial jobless claims remain well below 300,000 a week.
Home prices continue to rise. The Case-Shiller index of 20 top metros rose 5.9 percent last month, and Las Vegas jumped 6.2 percent.
Nor do investors appear overly bullish. The latest Association of American Independent investors survey finds more bears than bulls–37.38 percent to 30.22 percent. The 30.22 percent bulls is down from 46.2 percent at the start of the year and 33.78 percent a year ago.
However, there are anecdotal signs of complacency, if not the careless disregard that accompanies bubbles.
Stories are starting to appear about a Goldilocks economy. Lenders are pushing home equity loans again. Some are even offering deals to people with low credit scores with ads and offers reminiscent of the housing bubble of a decade ago.
Some fundamental measures are starting to make the market look pricey.
The S&P 500 price-to-earnings ratio is over 26. The earnings yield has slipped to 3.80 percent, and market-to-book value has swollen to 3.2 times.
Just before the 2008 economic collapse, Nassim Nicholas Taleb wrote the Black Swan, a book that examined unpredicted events that had extreme impact.
At the time, with the Great Recession as a daily object lesson, investors and analysts repeatedly asked what the next black swan would be, which missed the point that black swans are unpredicted.
However, the point is that unpredictable events do and will happen.
At a time when everything appears to be clear sailing it’s wise to remember that black swans at some point will swim into view.
