Despite recent concerns surrounding the safety record of troubled aircraft manufacturer Boeing, it remains difficult to avoid flying on their jets. Similarly, investors find themselves with few alternatives but to buy U.S. stocks, despite growing risks of a market correction outweighing the potential for significant returns.
While Boeing's stock has suffered due to a series of accidents, there has been nothing to shake investors' confidence in U.S. stocks. Regional conflicts, fears of a global recession, volatility in interest rates, and even historically high stock valuations have failed to impact rising share prices.
However, it is worth considering what could potentially undermine this unwavering faith in U.S. stocks. For years, making profits has been as simple as investing in a handful of major companies like Apple, Amazon.com, and Nvidia, or using exchange-traded funds for broad exposure.
A growing number of people perceive the market as immune to catastrophe. Yet, investors must challenge themselves to envision what could be as shocking to the market as a plane door opening at 16,000 feet on a packed flight. The recent incident involving Alaska Airlines has shattered the widespread belief that investing in Boeing is a safe bet, following the crashes of their 737 MAX jets in 2018 and 2019.
Just a few weeks ago, many investors were confidently proclaiming Boeing as a sound investment due to its status as one of the world's two major aircraft manufacturers and the constant demand for air travel.
However, after experiencing a 49% increase since late October, Boeing's stock has fallen by 24% in recent weeks and is approaching its 52-week low of $177.73.
Even more concerning is the fact that the stock has breached key technical levels, such as the 50-day and 200-day moving averages, suggesting substantial losses in the near future.
The Danger of Overconfidence in Investing
The recent reversal of fortune for a certain company serves as a stark reminder of the perils of overconfidence, a lesson that many investors seem to have forgotten. In the aftermath of the 2008-09 financial crisis, the focus shifted from managing risk to ensuring profitable returns.
Looking back on the 2020s, it is possible that historians will identify a collective delusion among investors, who clung to the belief that there was no alternative (TINA) to investing in U.S. stocks.
Over the past couple of decades, stock prices have consistently risen, leading to a shift in investment strategies. Instead of following the traditional approach of buying low and selling high, investors have developed an unwavering faith in buying high and aiming for even higher gains. This change can be attributed to the Fear of Missing Out (FOMO).
As a result, the Cboe Volatility Index (VIX), once considered a measure of fear in the stock market, has now become a reflection of greed. When the VIX reaches unusually low levels, it is no longer seen as an indicator of an impending correction. Rather, investors view it as a sign that bullish call options, which allow holders to buy an underlying investment at a predetermined price within a specific timeframe, are undervalued alternatives to purchasing stocks directly. This represents a shift from the past, when a low VIX prompted many investors to purchase bearish put options out of concern that excessive greed could trigger a market downturn.
Interestingly, despite various risk factors accumulating on the sidelines, investors remain unfazed by the prospect of buying stocks at ever-increasing prices. It seems that the greatest risk we face in our financial landscape is not investing in stocks at all.
Given this prevailing mindset, one may wonder: What event could bring investors back to reality and reintroduce a balanced perspective on risk and reward? Is there a metaphorical equivalent to a Boeing jet door being ripped off midflight that could shock investors into reassessing their approach?
The individual who can answer this question and position themselves accordingly will undoubtedly find themselves forever freed from the constraints of commercial flights.
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