So S&P 500 is 2 SD (95%) above its historical average... so what!?

Here's a thought.

We are still coming out of the 2nd worst economic crisis in recent history.Major crashes always lead to major bull markets (at least in the US). Business cycle = check
Interest rates have never been this low for so long and are not going to get to historic levels anytime soon. Monetary policy = check
Trump just passed a massive fiscal stimulus tax cut and wants infrastructure spending. Fiscal policy = check
US gov debt is high but manageable.


My point is, even though by historical standards the markets are very overvalued, if you put it into context it is not surprising, and there is reason to believe that the markets will go to 96,97,98 or maybe even 99% overvalued compared to historical contexts. I understand the mean reversion argument. Eventually we will revert to the mean. But I think it is flawed logic to assume that the mean reversion will come soon and you could miss out on growth if you hold cash or buy bonds now.

Comments

  • edited February 20
    Hi,

    I agree on almost all you wrote..except for the last sentence. I do not see any reason, why this time should be different - meaning that a massively overvalued market will revert to the mean and crash brutally. Yes, I can also not time that. Might be a couple of more years, might start tomorrow. But it will not be 10 years and extremely likely also not 5.
    So why should this time be different? All the points you brought up - well, we had all of them in the past before. Just when a market crashed!

    The economy was doing just fine in 1929, 1999 and 2006.
    Interest rates were very low in 1999 and 2006 (1929 I honestly have no idea and would have to check).
    And about Trump's tax cuts.. well, US companies already pay historically very low taxes. Even though the top rate is very high with 39%, the real tax rate is around 21% or so - because of multiple loopholes.
    And the infrastructure plan..well, Mr. President proposed $200 billion for that. Nice to have, but according to experts this is way too little to improve the US infrastructure:
    https://www.theguardian.com/us-news/2018/feb/12/trump-infrastructure-plan-200bn
    Besides, the infrastructure plan is still just that - a plan. It is not assured at all, that this will come.

    So all of your points seem to me "this time is different" arguments. Although we had all of these before and they never stopped a crash from unfolding.

    And what about all the negative things, ie. the ones that might improve the chances of a crash?
    The US might get out of NAFTA. Brexit might have disastrous economic consequences. The world is drowning in debt.
    What happens, if China gets a hard economic landing? If the US become really protectionist? What about the Itailian election - which might lead to a populist government that wants to exit the euro zone?
    Or we might have a nuclear catastrophe - nuclear risk is very high and growing:
    https://www.theguardian.com/world/2018/feb/15/nuclear-weapons-ernest-moniz-accident-risk

    Not all of these will happen. But we have an absurdly overvalued market and there are so many risks and uncertainties in this world right now. Not sure, if this is really the time to be fully invested.

    Thanks

    Christoph



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