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Why aren't investors scared?

January 17, 2013: 12:04 PM ET
CNNMoney's Fear and Greed Index is showing that investors are very complacent. Click the chart for more on how we calculate this sentiment gauge.

CNNMoney's Fear and Greed Index is showing that investors are very complacent. Click the chart for more on how we calculate this sentiment gauge.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

If you didn't know any better, you'd think that earnings were surging, the economy was expanding at a robust pace, everyone who wanted a job had one and that there was peace and harmony in Washington.

That's obviously not the case. But look at the stock market and it's as if we've all been transplanted back to the good old days of the mid-1980s or late 1990s.

The S&P 500 is near a five-year high. The VIX, a measure of market volatility often known as Wall Street's fear gauge, is near a 52-week low. And CNNMoney's own Fear & Greed Index, which looks at the VIX and six other indicators to measure market sentiment, has been firmly in Extreme Greed mode since the start of the year.

What gives? Why aren't investors a little more nervous about the future?

Sure, things aren't awful right now. The last-minute deal to avoid most of the tax hikes that would have taken place if Congress and the President pushed America off the fiscal cliff is a positive.

There are also more signs that the economy is picking up more steam. Thursday morning, the government reported strong housing starts numbers for December and a big drop in the number jobless claims filed last week. Retail sales for December were also better-than-expected.

If the housing and job markets continue to heat up and consumers keep spending, I might finally be able to abandon the low and slow barbecue recovery metaphor I've been using to describe the economy for more than two-and-a-half years.

But are the recent signs of life in the economy really enough to cause this level of excitement on Wall Street? No. I'm worried that investors are being too glib and are not concerned at all about what will happen if lawmakers and the White House don't reach an agreement to raise the debt ceiling. Another credit rating cut could lead to disastrous consequences for stocks just like the first one from Standard & Poor's did in August 2011.

With each passing day, investors' faith in Washington to actually do something smart to avoid a default should diminish.

How pathetic is it that many people think the United States, the world's biggest economic superpower, will have to resort to financial gimmickry to try and solve our budget woes? The lack of any constructive dialogue on the debt ceiling has given birth to preposterous ideas like a $1 trillion platinum coin, selling the gold in Fort Knox and invoking the 14th amendment. What are we? A banana republic?

Related: Debt ceiling FAQs: What you need to know

Outgoing Treasury Secretary Tim Geithner has already said that the government has started to borrow from the federal employee pension fund to keep paying our bills. That's just one of several "extraordinary measures" the U.S. has resorted to since we technically hit the debt ceiling at the end of last year. What's next? Putting federal property up for sale on eBay or Craigslist?

Oh. And if the debt ceiling concerns weren't enough, the fiscal cliff tax deal also didn't solve the pesky problem of the sequester. Automatic federal spending cuts that were scheduled to go into place at the end of last year are now scheduled to take effect in March.

Yes, investors often ignore Washington with good reason. The political freak show is largely theater and Wall Street has gotten used to deals happening at literally the last nanosecond. So why worry?

It's not as if the budget debate is the only cloud hovering over the market right now. Earnings have not been that good so far. Just look at the banks. Goldman Sachs (GS) was the one bright spot. Investors have found reasons to be nervous about the results from Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C). Considering that all of those banks have a lot more average consumers as customers than Goldman, that's a worrisome sign.

Related: Bank of America profit dinged by mortgage charges

It's often said that you need the banking sector to be healthy in order to have a healthy stock market overall. That's not the case so far this year though.

What's more, earnings are only expected to increase by about 7% for the S&P 500 this year, according to Thomson Baseline.

Another cause for concern? Individual investors plowed a record amount of money into stock mutual funds last week. That comes after investors pulled money out of stocks in droves last year even as the market was rising. The so-called retail investor has a history of getting to a bull market late ... just as it's about to end.

Now I'm not predicting some epic market collapse like we had in 2000 or 2008. Plus, there are plenty of blue chips throughout a wide swath of industries that look attractive. Apple (AAPL), Union Pacific (UNP), Walgreen (WAG), UnitedHealth (UNH), Allstate (ALL) and Corning (GLW) are examples of companies in the S&P 500 with relatively low debt loads, healthy earnings outlooks and valuations that are cheaper than the overall market.

But the market at large looks like it could be getting frothy. With earnings growth expected to be so lackluster this year, does the S&P 500 deserve to trade at about 14 times 2013 earnings estimates? I haven't even mentioned two other big global risks in this story, the possibility that Europe's woes linger and that China's suddenly resurgent stock market overheats.

Don't mistake this for bearishness. It's just realistic cautiousness. There simply aren't enough good reasons to be this jazzed about the market right now, not with all the possible dangers lurking around the corner.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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