Over the completion of the current market cycle, we estimate that roughly half of U.S. equity market capitalization - $17 trillion in paper wealth - will simply vanish. Nobody will “get” that wealth. It will simply disappear, like a game of musical chairs where players think they've won by finding chairs as the music stops, and suddenly feel them dissolving as if they had never existed in the first place. Moreover, even if U.S. real and nominal economic growth were to fully recover to their long-term historical norms, it would take 12-16 years of 6% nominal growth, with zero price appreciation in the interim, to bring reliable valuation measures back to their own historical norms.
Presently, based on the most historically reliable valuation measures we identify, we expect annual total returns for the S&P 500 averaging just 0.6% over the coming 12-year period; a prospective return that we expect will not only underperform bonds over this horizon, but even the lowly yields available on risk-free T-bills.
During the later part of the roaring 20’s, Irving Berlin wrote “Blue Skies,” which captured some of the optimism of the era that preceded the Great Depression. Unfortunately, untethered optimism is not the friend of investors, particularly when they have already committed their assets to that optimism, and have driven valuations to speculative extremes.
"The issue is no longer whether the current market resembles those preceding the 1929, 1969-70, 1973-74, and 1987 crashes. The issue is only - are conditions like October of 1929, or more like April? Like October of 1987, or more like July?
As Benjamin Graham observed decades ago, "Speculators often prosper through ignorance; it is a cliche that in a roaring bull market, knowledge is superfluous and experience is a handicap. But the typical experience of the speculator is one of temporary profit and ultimate loss."
If there’s any point in U.S. stock market history, next to the market peaks of 1929 and 2000, that has deserved a time-stamp of speculative euphoria that will be bewildering in hindsight, now is that moment.
Investors and even financial professionals rarely recognize asset bubbles while they are in progress. As the price of a financial asset rises, investors have an increasing tendency to use the past returns and the past trajectory of the asset as the basis for their future return expectations.
There are moments when one has the responsibility to speak if one has a voice.
The key to drawing useful information out of noisy data is to rely on multiple “sensors.” Alone, each sensor may capture only a small portion of the true signal, and may not be greatly useful in and of itself. The power comes when the sensors are used together in order to distinguish the common signal of interest from the surrounding noise.
One of the attempted barbs tossed my way at various points in the past 20 years is “Cassandra.” Frankly, I kind of like it.