- This time is ALWAYS different…
- A warning from ancient Greece…
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Dear Reader,
Fact #1: The stock market is deliriously overvalued by history’s standards.
Fact #2: Investors continue to pile into stocks despite Fact #1.
Reports U.S. Bank:
- Since early April, when the S&P 500 narrowly avoided a bear market, investors continue to shrug off higher tariffs, rapidly changing Trump administration policies, and ongoing geopolitical conflicts. Instead, investors appear more focused on company fundamentals and mostly stable economic data.
Just so. Yet investors who purchase stocks at today’s galactic valuations will likely come to grief.
They are “buying high” in hope of selling even higher.
Yet stocks are presently “priced for perfection.”
Alas, perfection is a condition rarely — if ever — attained in this tearful and sorrowful vale.
Imperfection is the predominating condition in the valley. And I hazard the future promises far more imperfection than perfection.
Yet investors cling wistfully and charmingly to the belief that “this time is different.”
This Time Is ALWAYS Different
As I have argued before:
“This time is different,” runs the eternal refrain of investors.
And it always is different — in the particulars.
A dot-com boom is not a housing boom is not an artificial intelligence boom.
It is these particulars that fox and deceive investors. It is precisely why they believe this time is different.
Because they believe this time is different… is precisely why this time is always the same.
It is precisely why investors perpetually stumble into the snare.
It is precisely why investors come invariably to grief. It is precisely why investors will come to grief in this instance.
History? Pfft, Who Cares About History?
Crackerjack market observer, Mr. John Hussman:
- My impression is that the exuberance of the moment is too strong for investors to care about history. As is true in every bubble, investors are undoubtedly convinced that we’re in a new era to which history doesn’t apply.
- Simply observe corporate profit margins, for example, and the fact that they haven’t eroded in years, and it’s natural to imagine that they’ve simply established permanent highs beyond all historical experience.
Yet investors might have another guess:
- The fact is that U.S. productivity growth since 2000 has been slower, not faster, than during the previous century. Investors have conflated elevated profits with technology, innovation, and hand-wavy features of a “new era.”
- Yet the reality is that record U.S. corporate profits and free cash flows over the past two decades have directly relied on the distortions created by “free money” policies.
- Those “free money” policies include not only fiscal deficits, but monetary policy that — for much of the past decade — funded those deficits by flooding the economy with zero-interest cash, which also significantly reduced corporate interest costs.
- That’s where the record profits have come from. It’s not a theory. It’s an accounting identity.
A Lot of Whiz, Not Much Bang
Yet have not technological innovations of recent decades fanned economic productivity, Mr. Hussman?
- Despite the emergence of the internet, smart phones, networking, cloud computing, and countless other technological breakthroughs in recent decades, S&P 500 revenues, corporate profits, and GDP have grown slower, not faster, than in the decades prior to 2000.
- We forget. In the exuberance of this moment, the S&P 500 information technology index is priced at valuations that… now require a permanently high plateau in profit margins and growth rates.
- Again, they are priced for perfection. Overall, Gloomy Gus?
- Overall… the stock market stands at the highest level of valuations in U.S. history, easily eclipsing the extremes of 1929 and 2000. Investors have clearly placed a great deal of confidence in these elevated valuations as a result of elevated corporate profits (a historically disastrous form of double-counting).
- Yet… these profits inherently reflect the impact of two decades of “free money,” largely driven by crisis-related spending free-for-alls that produced discrete spikes in the debt/GDP ratio.
Yet is money ever truly free? Alas, it is not. It is always attached to a string.
Investors Expect Perfection, the Gods Have Other Plans
Here is what a recent survey by Natixis Investment Managers reveals:
Investors with a minimum of $100,000 of investable assets expect long-term returns of 10.7%.
That is, 10.7% above inflation. Thus they anticipate perfection.
Yet today’s maximally elevated valuations nearly ensure actual returns will come in substantially beneath expectations.
By certain calculations, investor odds of losing money approach 100% across several years — odds that would make even the bravest fellow quail.
Please understand: Here I do not forecast stock market weather.
Merely because present valuations run to record heights… it does not mean that valuations cannot continue running to record heights.
Valuations are not barometers of looming market weather. They do not indicate when heavy weather may roll in.
They do not enable you to “time the market.”
They merely imply long-term returns.
And present valuations imply vastly diminished long-term returns.
Thus modern investors — largely dismissive of market history — might take aboard an ancient warning.
It offers instruction in the concept of mean-reversion. That is, instruction in time’s leveling effects:
“The mills of the gods grind slowly,” said ancient Greek Sextus Empiricus…
“But they grind exceedingly fine.”
Brian Maher
for Freedom Financial News
