In today’s fast-paced world, we find ourselves inundated with news. Each day presents a new opportunity to dive into the latest stories, many of which teeter on the edge of absurdity.
Take, for example, the recent auction of Balloon Dog, which fetched an astounding $58.4 million at Christie’s last fall. This eye-catching piece, a stainless steel sculpture designed to resemble a gigantic balloon animal, has certainly captivated many. But the artist, Jeff Koons, offers a deeper reflection on this seemingly whimsical creation. “I’ve always enjoyed balloon animals because they’re like us,” he explained. “We’re balloons. You take a breath and inhale, it’s optimism. You exhale, and it’s kind of a symbol of death.”
This dynamic between optimism and the inevitability of decline is echoing throughout various markets. In a recent Christie’s auction, a remarkable $745 million in art was sold, marking the highest total for a single event at the auction house, not adjusted for inflation. Illustrating the significant shift of wealth from the West to the East over the past decade, about half of the purchases were attributed to Xin Li, deputy chairman of Christie’s Asia.
But as the art world experiences a surge in demand, we can’t ignore the eventual exhalation that follows. This, according to Koons, symbolizes death—a cautious reminder of what might come next.
The Worst Investment
The trajectory of the stock market seems to mirror this phenomenon, currently caught in the latter stages of a significant inhalation. Just last Tuesday, both the S&P 500 and the DOW reached new highs, with the S&P 500 momentarily surpassing 1,900 before settling at 1,897.
These milestone figures often carry little meaning. While 1,900 could simply be a stepping stone to 2,000, it might also indicate a market peak. Even with recent declines, the uncertainty remains palpable.
However, there is reason to approach this marker with caution. Similar to the unsettling price tag of the $58.4 million Balloon Dog, the S&P 500 at 1,900 may be more a reflection of collective illusions than of rational analysis. Consider this: the S&P 500 is currently valued at 18.85 times its trailing twelve-month earnings. While earnings per share are at all-time highs, this means corporate profits will need to either grow substantially or stock prices must decline for valuations to stabilize.
Additionally, the current dividend yield on the S&P 500 stands at a mere 1.92 percent. This implies that even if stock prices hold steady, it would take an investor approximately 40 years to break even. Outside of an extravagant artifact like Balloon Dog, how could any investment seem worse?
A Symbol of Death for Stocks
Could the unthinkable happen? There have been numerous instances in the last 15 years when perceived overvaluations in stocks have persisted, only for late investors to suffer severe financial losses as prices eventually corrected.
Yogi Berra wisely noted, “It’s tough to make predictions, especially about the future.” This sentiment is particularly fitting in the context of markets. While precise market timing remains elusive, certain metrics can still provide valuable guidance.
Although these metrics won’t guarantee you miss out on potential gains, they do promote a sense of humility, especially when cash reserves are stagnant while the market rises. Generally speaking, stock markets that exceed their historical averages will eventually return to their mean, while those undervalued will trend upwards.
The S&P 500 is currently well above its historical mean, with bleak prospects for near-term earnings growth. The existing bull market is now in its fifth year.
Over the last century, average bull markets lasted around 755 days, yielding about an 85 percent increase. Currently, we’re experiencing a bull market exceeding 1,885 days, with gains over 180 percent—more than double the average.
In conclusion, the stock market behaves much like a balloon animal. Just as rallying demand leads to a breath of optimism, the inevitable exhalation—and potential decline—awaits. This cautionary tale rings true, and perhaps it’s time to acknowledge that the correction is not just overdue; it’s becoming increasingly inevitable.
Sincerely,
MN Gordon
for Economic Prism
