As a youngster, every Christmas our family made an annual pilgrimage from Brisbane to Rockhampton to see our grandparents.
Watching mile after endless mile of bitumen was boring beyond belief.
With increased frequency one of us (there were five children) would ask ‘are we there yet?’.
‘Nearly. Be patient’ was the parroted response from the front seat.
At the time, it felt like it’d take an eternity to reach our destination.
Cashed-up investors are experiencing the same feelings of boredom and frustration.
Year after year, the risk-averse have watched the US share market travel from record high to record high.
Each year brings fresh hope that finally, this will be the one when the market’s journey north ends.
But, after more than a decade, there seems to be no end in sight. We appear to have a market that’s perpetually travelling to higher plateaus.
Those with money in the bank have been left in a cloud of dust as the market speeds by.
Unlike a road trip, with a known number of kilometres to travel, markets do not tell you in advance the length, speed or duration of the journey.
The following table proves that no two bull markets are alike. Some take longer than others and some perform better than others.
Source: Charlie Bilello
The one thing they all have in common is…they do end. That’s the good news…well it is if you’re invested in cash.
The bad news is, we don’t know when.
There are signposts along the way that indicate when conditions ahead might change. However, the distance between past and present signposts is never constant. It varies from cycle to cycle.
Each market journey takes its path north and south.
The road travelled last time rarely repeats itself the next time.
The one constant is markets rise and markets fall.
The charts in today’s Rum Rebellion serve as our historical roadmaps.
They provide the clues as to the changing road conditions ahead.
Failing to heed these warning signs puts your capital at risk of being involved in a head-on collision with reality.
In broad sweeping terms, markets embark on a journey through the valuation cycle.
They move from the valley of undervaluation to the peak of overvaluation and back again.
It’s a time-honoured journey the US share market has made for almost 150 years.
However, the length of the journey and the heights reached and the depths plumbed, vary from cycle to cycle.
Since the early 1920s, there have been three distinct valuation cycles in the US market.
The first was from 1921 to 1948.
Source: Macro Trends
After the 1921 Depression (yes, there was a short, sharp and severe depression in the early 1920s), the Dow Jones index came to rest around the 60 points level…falling from 120 points a year earlier.
The Dow’s journey north from that undervalued valley was spectacular. Soaring more than six-fold over the next eight years.
Then came the inevitable trip back to reality. It took almost 20 years for the next cycle to begin.
Source: Macro Trends
After 1948, the Dow began another long-distance journey to northern heights.
In early 1966, the Dow came within a whisker of 1000 points…a six-fold gain.
The size of the gain was almost identical to that of 1921 to 1929.
However, the timeframe to reach the destination was much longer…18 years compared to eight years.
After 1966, the market spent the next 16 years zigging and zagging its way to an undervalued position.
Since the depths of 1982, the Dow — in spite of setbacks in 1987, 2001 and 2008 — has travelled in a northerly direction.
Rising from 800 points to 27000 points.
The following chart helps to put into perspective the extraordinary difference between the current cycle and the previous two.
The vertical index is the cumulative rate of return each cycle has delivered.
The horizontal index is the duration (in months) of the cycle…the length of the journey from valley to peak to valley.
Source: Macro Trends
The market’s first two ‘road trips’, both rose to the 500% marker and then either fell away or tapered off.
The latest secular cycle (1982 to present) has no precedent in duration or level of gain.
It’s a truly unique journey.
We are yet to go through the descent phase of the cycle.
We’ve been in the ascendency phase of the cycle for almost four decades. This is unheard of.
And it’s why there’s such conviction in the mantra of ‘in the long term shares always go up’.
This ascendency phase of the journey is all most investors have ever known.
Share investors have been conditioned to believe it’s just a case of sit back and enjoy the ride.
But, the road travelled is not necessarily the one in our future.
In 1929 and 1966 investors had no inkling of the adverse change in road conditions they were about to encounter.
The speedy progress of the past was about to come to an abrupt end.
The problem with the current cycle is that it’s gone on for so long.
Central banks have lulled people into a false sense of security.
There’s a genuine belief in the Fed’s ability to repair any market potholes and have you back on the road again.
But what if the next collapse is far worse than anything we’ve yet encounter.
To help frame your thinking…this is the market BEFORE the next collapse.
Source: You Tube
But what happens when the next market collapse turns out to be more than a pothole?
Source: You Tube
The Fed no longer has quantity of materials needed to fix a market hole of this size. Very few people recognise this fact.
This is when it turns into the road to hell for share investors.
How close are we the next collapse?
It’s official…the US market is overvalued
While history does not always repeat itself, it does tend to rhyme.
As stated previously, markets go through cycles — undervalued to overvalued to undervalued.
Irrespective of what some industry vested interests might say, the valuation cycle still exists.
Not even the mighty Fed can repeal the laws of physics and mathematics.
Everyone has an opinion on where the US market might be on the ‘value’ scale.
Even the IMF has waded into the debate.
As reported by Market Watch on 17 October 2019 (emphasis is mine)…
‘An environment of low interest rates has set off a search for yield and created stretched valuations in risk assets, including the U.S. equity market, according to an International Monetary Fund report released Wednesday.
‘Equity markets appear to be overvalued in Japan and the United States,’ the IMF said, in its latest Global Financial Stability report.’
You’ve got to love the tact in the IMF’s choice of words…‘stretched’ and ‘appear to be’. Officially, the US market is no longer fair value.
Unofficially, historical valuation methods tells us the US market is well beyond stretched…it’s travelled into rarefied (and terrified) territory.
By any measure, Wall Street (which influences the whole world) is much closer to the end of its journey to higher highs than it is to the beginning.
How much longer before we reach the destination? How deep is the sinkhole likely to be? Which one of three possible pathways to hell might the market take?
In tomorrow’s Rum Rebellion we’ll let you know what the forward scouts — those who have been on this journey before — are telling us about the conditions ahead.
PS: Is the Australian economy in danger of a Japanese-like economic winter? Download your free report now.