The Stock Market Boom / Bust Cycle: Where Are We At Now?

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There appears to be a trend of everyone is getting their “stocks are highly-valued” calls on record in so that when the next drawdown occurs, they’ll have their “I told you so” ready to go. I should probably do that too. Example: Goldman Warns That Market Valuations Are at Their Highest Since 1900.

Here’s the boom/bust cycle chart you may recall from the Housing Bubble era. Instead, this ValueWalk article places us very close to the top point of the cycle for the stock market:


The more valid point of the article is that sooner-or-later, there will be some fear and pain. We should be prepared for another opportunity like 2008/2009 to be “greedy when others are fearful”.

In hot pink, I decided to throw in my own bit of speculation. The other half of the Buffett quote is to be “fearful when others are greedy”. My opinion is that I am not hearing enough greed. Many people are more anxious than euphoric. I think we are actually closer to the “Thrill” point. In terms of the big picture, it’s not that different. We should still be careful. What do you think?

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  1. Jonathan, I share your concern about the valuation of stocks, I recall the fear in Warren Buffett himself when that large (and uncharacteristic) S&P 500 derivative bet was going against him in the last crisis, and I place a comfortable retirement above the attainment of massive wealth.

    This is why I fail to understand why you haven’t undertaken a EE bond buying program. My wife and I have been maxing EE bonds since 2015 and plan to do so indefinitely. With the 30-year rate at 2.7%, this is simply a gift from the government; add to that the tax deferral. Yet each cycle your position on EEs remains “20 years–too long for me.” I don’t get it.

    • I am wary of inflation as well as a stock market bust, so I’m not very interested in a 30-year bond at 2.7% or even a 20-year bond at 3.5%. Who knows what will happen in the next 20 years? I know businesses will keep on pricing their goods at a profit, but inflation could be 5% a year or more for a while. I’d rather for example take TIPS at 0.5% above inflation for the next 5-10 years, whatever that inflation ends up being.

      • But isn’t deflation/disinflation a risk as well? Isn’t that signaled by the chronically low yield on the T30? Don’t get me wrong, I have a lot of other assets, and I certainly worry about inflation as well. But there is some risk to preparing to fight the previous war. And even if businesses continue to price at a profit, valuations based on rapid growth are vulnerable to protracted disinflation.

        • You may be right to be worried about deflation. I suppose I don’t think the protection is worth the “cost” in terms of lower returns if there isn’t long-term deflation.

    • As someone mused, economics is just astrology for dudes. Or to put it another way, maybe it’s just virtual LSD, because it generates endless, powerful hallucinations for those who find money such a fascinating topic.

      PS – none of you know ANYTHING and never will. Capitalism is such a poor substitute for imagination.

  2. It’s interesting that you think the next bear market will be a la 2008/2009. Perhaps that’s a bit of recency bias on your part. If I had to guess I would say it will be more like the dot-com bust (which is preferable?). Perhaps my recollection is off but in 2008/2009 people thought the world as we knew it was coming to an end, 2000/2002 people were just losing money. I think investing throughout the drawdown is a bit “easier” if you’re not worried that the capital markets themselves are going to collapse.

  3. I’ve never been gifted a horse before, but this was about as close as it gets. I’ll be careful not to stare at his or her mouth.

    I moved 15% of my stock portfolio (mostly commission free ETFs) to fixed (variable income) income at DJIA 22K and nearly moved another 15% yesterday but feel there is still a little more time before the euphoria over the tax deform (intentional typo) gets fully priced into the market. I always try to match my stock/fixed ratio with the odds that I feel the market will correct, keeping in mind that I have been fully vested in mostly U.S. large-cap growth for 99% of my investing life. This has been a simple but highly lucrative strategy for me. Perhaps, one day, I’ll write a book about it. Obviously, it is impossible to time the market perfectly. But by partially scaling in and out over long-term boom/bust cycles, I’ve managed to beat the comparative market indices/benchmarks handsomely. Keep in mind, this is only the third time I’m attempting this in the equities markets. I saved my hide during the dot-com bust and played the financial crisis well on the sell point, but missed the bottom by a bit on the way back in. But by scaling out and back in, the miss was not nearly as painful. For sure, I still did significantly better than anyone who just rode it out. I also had the misfortune of buying my first home (a multi-family) in 2004 which was probably during the “thrill” period of the housing bubble. But to counter, I bought my second home (a single-family) at the absolute bottom of the housing market. I was able to lowball the seller too, so I really made out like a bandit. I held on to my multi-family and it is generating revenue (and tax write-offs) like I never could have imagined it would. It’s also now worth nearly 15% more than when we bought it. Our single family is up 40% from where we bought it (back in 2011), but that’s because we nailed the bottom. Best of all, we refinanced from a 20-year mortgage on our multi and a 30-year mortgage on our single-family into two 15-year mortgages on the day in which the interest rates were at their lowest ever. It’s come close a few times since, but has not hit the record low number in which we locked at. I think it was 2.75% on the single and 3.25% on the multi (they charge a higher rate on income generating property). Needless to say, my family, like yours, is well on it’s way to a comfy retirement. Especially if we retire in Costa Rica, which is my plan. My wife hasn’t bought into yet, but I think she will in a few more years of begging. The full-time housekeeper for $300 a month is definitely softening her stance.

    As always…thanks for your many plain language blog entries. You have saved me countless shekels and have contributed to earning my moniker, “Captain Cheapo.” I prefer, “Fantastically Frugal.” But my friends are a tough crowd.

    Keep on keepin’ on Jonathon

  4. I agree that we’re not quite at the time. People aren’t euphoric enough yet. Also, with the economy chugging along recently it’s going to make people less likely to start selling.

    Still, any dollars you put in now you shouldn’t expect to make much money on for a very long time.

  5. Jonathan, I agree that we are closer to a top for U.S. markets but the upward trend we’re experiencing can continue to run for a while longer. I don’t see signs of a recession, liquidity in financial markets seems stable, and commodities indicate strong demand. There isn’t a clear indication that a correction is imminent although I have an unfounded hunch that it will begin in January. 🙂 What do I do in my portfolio in the mean time? I have the opportunity to rebalance my portfolio but should I instead change the allocation to move more money into treasuries? I suspect that you plan to keep your portfolio allocation as it is. Have you looked at how much you are going to potentially lose if U.S. equities do correct beyond the mean reversion? An article on evaluating the potential downside and what your plan when this occurs would be very interesting to me. Thanks as always for your blog.

    • I don’t know about the ideal allocation, but I agree the time to think about what would happen if a big drawdown occurs is now, not later. It’s hard to know exactly how one would react, but I’d at least try to visualize. I like to think that I am prepared for a 50% drop in stocks.

  6. There will be a correction, that we all know, when will it be? That’s everyone’s guess. Trying to time the market is never a smart thing to do. Why worry about it?

  7. The new tax cut is essentially a new stimulus. It’s probably going to push the stock up even further. Unfortunately, I feel that this kind of stimulus is probably not needed at this moment since the economy is getting hotter already, and there are plenty liquidity in the market. What the GOP is trying to do is confusing to me. Either they really believe it, or they are doing this to essentially undermine the very foundation of the federal government. I am thinking it’s the latter. Either way, the business cycle will occur, and it will hurt. We just can’t time it but we’ve been through several now to have a sense of readiness for it (even though we still don’t know what to do when it happens).

  8. The next crash may be the biggest one. The result of huge debt, prolonged period of record low interest rates, and money printing. The “emergency” measures of extreme low interest rates are just now ending after like 10 years which means we never really recovered (QE was going on for a good chunk of that decade too). Price discovery and normal markets have been distorted too much. The Fed normally lowers interest rates in a recession, but we are already at the bottom so they have no room to work with. Some may say there has not been too much inflation from this monetary experiment. Actually there has been inflation in housing, stocks, and more recently bitcoin. The question is will it ever spill into the rest of the economy? If you look at the 2000 crash it was stocks, the 08′ crash was stocks and housing, and the next one may be a combination of stocks, housing, bonds. Even further down the line the US Dollar could even be a huge problem.
    A key technical indicator is the Dow/Gold ratio, link above. Looking at the last 100 years when the D/G has been above 20 (it is currently at 19 and rising) there has generally been an economic problem that has brought the ratio back down shorter after. This indicator of stock market overvaluation has only been above the 20 mark for about 20 years out of the last 100 years, a relatively short lived phenomenon (lasting about 20% in duration out of the last century). The ratio going down may be a good play for gold, and even more so silver if you consider the current gold / silver ratio. The D/G and G/S ratio charts indicate gold and especially silver are currently quite undervalued. I would be putting a minimum of 10% in the metals now and probably more. If gold is not your thing then I would at least be considering tangible assets as opposed to stocks. (Even housing currently has a decent values in some areas, not San Francisco but maybe places like Orlando. You might consider good cash flow rentals).

    I have been following a lot of great YouTube channels that generally give a quite separate view from the mainstream media (who are always bull cheerleaders). I recommend the following that you can search for on YouTube, below. As an added note, I do not believe every opinion expressed from these sources, but it is at least a good “bear” counter balance to the mainstream (CNBC, etc) “bulls”. My advise is listen to both and make up your own mind.

    Recommended for economic news:
    Greg Hunter
    SGT Report
    X22 Report / X22 Report Spotlight
    Gregory Mannarino
    Finance and Liberty
    Chris Martenson (Peak Prosperity)
    Boom Bust (RT)
    Peter Schiff
    GoldSilver (w/ Mike Maloney)

    • I think media these days is so niche that it can be customized for whatever view you like – doom or boom.

      For some reason that reminds me of something else I saw on YouTube – Anybody out there invest in turnkey rental properties?

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