Grasping at the Suds of Yesterday’s Bubble

"The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd, and the dream of the sure thing – these factors are near universal. Thus they have a profound impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, widespread, and recurring.

Rather than trying to figure out the future, try to figure out where we are in the market cycle, make adjustments if necessary when close to the extremes, and prepare mentally to avoid behavioral mistakes that plague investors throughout. The key is to watch for investor behavior that typically emerges, especially at the extremes of the cycle, " Howard Marks, The Most Important Thing.

I’ve often noted that asking me whether stocks are in a bull market or a bear market is like asking Christopher Columbus whether he thinks the trees at the edge of the Earth are maples or pines. I just don’t look at the world that way. Bull markets and bear markets can’t be identified in real-time – only in hindsight. More importantly, the return/risk profile of a “bull market” or a “bear market” can change dramatically depending on whether valuations are consistent with the beginning of a market cycle or the end of one. The terms bull and bear are inadequate to capture all the variations in observable, measurable conditions that shape the market return/risk profile that investors face at any point.

Phrases like “bull market” and “bear market” can create a false sense of security because they seem to offer investors assurance about extended market direction – witness the constant chatter here about a “new” bull market that has “legs.” Words like that, often dressed up with adjectives like “official” to boost their respectability, quietly encourage investors to think “This thing is going to go up for a very long time.” So shiny.

SEC Crypto Crackdown

The problem here is that the S&P 500 now stands just 8% below its 2022 bubble peak. Whether it gets back to that peak, or not, doesn’t really change where we are in the cycle. Our most historically reliable valuation measures stand at or above their 1929 and 2000 extremes, exceeding every level seen in history prior to October 2020, with the exception of a few weeks surrounding the 1929 bubble peak. Meanwhile, our measures of market internals remain unfavorable, interest rates are nowhere near zero, long-term bond yields – as we’ll see – remain inadequate, and recession risk is quickly increasing.