The enchanting aspect of a late-stage bull market is its propensity to broaden the horizons of possibility. The surge in stock prices transforms the unimaginable into reality while extending the bounds of normalcy into the realm of the extraordinary.
For instance, just last week, there was an astonishing report of a Bigfoot sighting near Avocado Lake in Fresno County, California. This wasn’t an isolated incident; a local farmer claimed to have witnessed a family of five or six Bigfoot roaming across his ranch in the dead of night. Paranormal expert Jeffery Gonzalez provided this intriguing account of one sighting :
“One of them, which was extremely tall, had a pig over its shoulder. The five scattered, and the one with the pig was running so fast it didn’t see an irrigation pipe and tripped, sending the pig flying.”
What should we make of this phenomenon?
Undeniably, Bigfoot sightings contribute to a sense of growth; they appear bullish for stock prices. Likewise, North Korea’s threats of imminent nuclear conflict also echo a bullish sentiment.
How can we assert that these seemingly unrelated events are favourable? By observing the trajectory of the S&P 500 since they occurred, we find that the market has risen. There exists a clear—if misleading—correlation.
In today’s climate, even a tenuous correlation holds significant value. The adage that correlation does not imply causation is disregarded far too easily. Such intricate details often seem irrelevant to adherents of the Phillips Curve—so why should they matter elsewhere?
Indeed, numerous factors that once held sway have become inconsequential. Stock valuations, profits, and particularly deficits, no longer bear the weight they once did.
The Greatest Fools of All
The overarching point is that an eight-year streak of rising stock indices has disrupted, if not obliterated, the fundamental laws governing markets. Actions once labeled reckless are now lauded as clever. Meanwhile, time-honored investment strategies, such as assessing business fundamentals, seem outdated for those who thrive on innovative thought.
The proof is evident; investors are eagerly consuming this market like delicious funnel cakes at a county fair. Their appetite is insatiable.
They are willing to endure long queues in the glaring sun to buy Amazon stock at $1,000 per share, all while its price-to-earnings ratio exceeds 250. In this late-stage bull market, growth and revenue become the primary metrics, overshadowing traditional concerns about profit margins.
To be fair, Amazon is no longer operating at a loss. Last year, the company posted a net income of $2.4 billion. However, this was achieved with a staggering $136 billion in revenue, resulting in a slim profit margin of just 1.7 percent. While some profit is indeed better than no profit, we must acknowledge how much effort was expended with so little leftover.
This raises the question: what compels investors to flock to Amazon? Are they eager to share in a highly profitable enterprise with abundant net income? Is there a dividend waiting for them as a reward for their investment?
Not at all. Amazon investors do not receive any immediate income stream; instead, they gamble on the hope that a “greater fool” will be available to purchase their shares at a premium when they decide to sell. In fact, those who purchased shares at $1,000 may soon discover a lack of greater fools left in the market—yesterday’s closing price was $986. Consequently, if buyers fail to find a greater fool, they may indeed be the greatest fools of all.
Tales from a Late Stage Bull Market
It’s clear that Amazon stock has proven to be a lucrative speculation over the past two decades. Its stock price has soared from a split-adjusted $1.50 during its initial public offering in 1997 to over $1,000—yielding an astonishing increase of more than 60,000 percent. Every dollar invested has appreciated to $600.
However, at this late juncture in the bull market, it appears doubtful that Amazon will continue its ascent indefinitely. The reality is that the company’s profitability is unlikely to match its current market valuation. Investors who purchased shares at $1,000 might not see a chance to sell at that price again until 2040, if at all.
Looking at the broader stock market, it is presently overvalued according to 18 out of 20 valuation metrics. While predicting the stock market’s peak is a task best reserved for fortune tellers, anyone with a modicum of insight can recognize that we are much closer to the next zenith than the previous nadir.
Therefore, if you’re set on purchasing stocks, it’s imperative to grasp what exactly you are investing in. Are you acquiring growth and revenue inflated by excessive debt loads? Or are you purchasing a company that generates solid after-tax profits and distributes them to shareholders?
Understanding this distinction is crucial. Yes, high-growth companies buoyed by extensive monetary policies were the lucky lottery tickets of recent years. But when the dust settles post-crash, and Bigfoot sightings lose their influence as bullish indicators, traditional, profitable businesses will emerge as the coveted assets for discerning investors. Everything less than that will likely be dismissed.
Sincerely,
MN Gordon
for Economic Prism
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