With U.S. stocks flying high, advisers should caution clients

It has been two decades since then-Federal Reserve Chairman Alan Greenspan used the phrase "irrational exuberance" ​ to describe the general mood of investors during a December 1996 speech at the American Enterprise Institute. At the time, before the advent of modern social media culture, it was considered a bold declaration from the head of the Fed. Mr. Greenspan, who was concerned about inflated market valuations during what became known as the dot-com bubble, drew both praise and criticism for his comments. Three years later in early 2000, the market had the last word. The bubble ultimately burst, sparking a 2½-year peak-to-trough pullback that amounted to a 45% decline for the S&P 500 Index. We're not suggesting the stock market is on the precipice of a similar tumble, but financial advisers should be cognizant of where the market is now relative to where it has been — and how that might be influencing their clients. It's not that there's an absence of warning signs or perspectives reminding investors that what goes up often, at least temporarily, goes down. Earlier this month at the Sohn Investment Conference, DoubleLine Capital CEO Jeffrey Gundlach recommended shorting the S&P 500 and going long emerging-market stocks. Mr. Gundlach clarified that his strategy is more of a relative-value play than a full-on bet against the S&P. But nobody shorts anything if they don't expect it to go down. Stack that against the latest investor sentiment measurement that shows a level of bullishness not seen since 1993, and it looks as if advisers should prepare to earn their pay by ensuring that clients don't lose perspective. Most professional market watchers see the strong investor sentiment, as measured by low volatility, as a sell signal. The S&P is up more than 250% from its lows in the 2008 financial crisis, but there have been pullbacks along the way. What the market hasn't seen is any significant hiccup since the presidential election and the upset victory by Donald J. Trump. Investors are seeing strong corporate earnings, falling unemployment and a more business-friendly tone from Washington. For the most bullish investors, the Securities and Exchange Commission recently approved an exchange-traded fund that quadruples the exposure to the S&P 500, just the latest sign of what Mr. Greenspan might describe as aggressive exuberance. While most advisers are less likely to be swept up by the momentum, it's important to remember that your clients aren't always as rational.