By almost every valuation measure, the stock market is pricey and the risks of a significant downturn have increased. We do not believe that most investors understand the risks inherent in the current market environment, nor do they have realistic expectations for what the market is likely to do for them in the future. Without such an understanding, they may end up getting something very different than they bargained for. The Baby Boomers are finally recognizing that they are older than they would like to believe and should start investing for retirement. Because they want to ensure a future lifestyle that is very much in keeping with the one they have enjoyed to date, their investment expectations are aggressive and they have been conditioned to believe that stocks are the best way to achieve them.
Strong demand causes higher prices and, therefore, a continued bull market.
So goes the theory. What the theory misses is that it is a fool's game to pay higher prices to take more risk. Stock prices, like any security, must ultimately be supported by the earnings and value of the underlying companies that they represent. When market pricing violates basic valuation standards, investing crosses the line into speculation. We believe that the market has crossed this line.