Our expectations are already lowered for general market returns. When expectations are this high, our fear of losing overcomes any fear of missing out. We still see a high probability of an economic downturn and remain defensively positioned for that reason as well, and we continue to hold some cash and hedges that should protect our portfolios when everybody else’s expectations are lowered.

Only time will tell whether today’s lofty index valuation levels represent a grand illusion relative to prevailing and forthcoming economic underpinnings. Either way, our macro and micro analysis suggest that investors are simply too optimistic about stocks generally, boosting overall risks. Market declines may be closer than they appear.