There’s a popular saying that “bull markets don’t die of old age.” This phrase likely emerged during a time similar to our current economic climate, characterized by a prolonged upward trend in stock prices that seems increasingly disconnected from the actual financial performance of the companies involved.
The saying seems to serve as a justification for why stock prices should continue to rise. However, the rationale behind such claims eludes us. Perhaps it provides comfort to those who utter it, allowing them to feel secure in both their understanding and their circumstances.
Today’s bull market, which has continued for over seven years, has reached an irrational peak. Who in their right mind would invest hard-earned money, expecting just $1 in earnings for every $26 spent? Other than low-yield Swiss or Japanese bonds or perhaps a chance at the lottery, we can hardly think of a worse investment prospect. Can you?
Yet, the current cyclically adjusted PE ratio stands at approximately 26, and this is precisely the scenario S&P 500 investors are embracing. What’s going on? The glimmer of trading on public exchanges, coupled with years of rising markets, seems to soften the judgment of otherwise rational individuals.
This isn’t mere speculation; we are genuinely attempting to grasp the current financial landscape.
The Fallibility of Human Judgment
Take, for example, Yale economist Irving Fisher’s famous proclamation in early October 1929 that “stock prices have reached what looks like a permanently high plateau.” What inspired this conclusion? Did he believe he was offering a golden investment tip?
Ultimately, the month ended with a catastrophic market crash. Those who acted on Fisher’s optimistic forecast struggled to recoup their investments for a quarter of a century, with many facing losses that would haunt them until their demise.
Much like today, Fisher’s perspective was obscured by the illusions created by a prolonged bull market. He fell victim to a common human error: assuming that what is true today will also hold tomorrow. The belief often goes that, although details may change—perhaps the Cubs will finally secure a championship—overall trends will remain constant. In this instance, that translates to the expectation that stock values will rise, simply because they have been rising.
Regrettably, this belief is only occasionally accurate. At times, it can lead to severe financial consequences for investors.
Not even a cyclically adjusted PE ratio of 30 gave Fisher pause for thought before he spoke. To be fair, this was not a metric widely tracked during his era; with the benefit of hindsight, it’s easy to criticize Fisher for his dramatic misjudgment.
We’ve learned from experience how humbling the stock market can be. Even the most astute investors sometimes find themselves on the losing side. For many of us, these moments of reckoning occur more frequently than we care to admit.
Reflections on Market Behavior
Financial markets can be perplexing. They may seem predictably cyclical, yet being correct does not guarantee success. Sometimes, it’s far more costly to be right at the wrong moment than to be wrong at the right one.
Take Tesla, for instance—historically, we viewed it as a poor investment, just as we did with Facebook and Google. Yet, those who invested in Tesla prior to March 2013 have enjoyed substantial gains—at least for now.
As of Thursday this week, stock prices largely fluctuated without any significant movement. What does this mean for the bull market? Is it consolidating, or are signs suggesting it may be reaching its peak?
The answers vary depending on whom you ask. However, what remains indisputable is that this is not a “permanently high plateau.” Caution is warranted—not just from us, but particularly from those whose insights are worth heeding.
Currently, several renowned investors—Stanley Druckenmiller, Jeremy Grantham, and Gary Shilling—are all independently issuing warnings about the potential for a market crash. Whether you choose to agree with their analysis is up to you, but it’s prudent to take their warnings seriously.
These individuals possess a wealth of knowledge and proven track records that lend credibility to their predictions.
Sincerely,
MN Gordon
for Economic Prism
Return from Visions of Tomorrow from the Permanently High Plateau to Economic Prism