Joshua Brown asks, “And you wonder why regular people have simply tuned this entire thing out at this point?” I highly suggest reading his example of a single day in the market to understand what he is driving at, but the point is broader than that. It has gotten to the point that according to the Wall Street Journal:
…across the financial markets, a sea change is taking place. Investors are abandoning the time-tested “stocks for the long run” optimism that dominated since the late 1980s. Instead, there is a widening belief that the mess left behind by the housing bubble and financial crisis will be a morass to contend with for years.
Is that bullish? Or is the ‘dumb money” right this time? I can believe either way for now, but longer term I believe we will see this continue until the secular bear ends in a whimper at very low valuations because nobody cares anymore. The stock market won’t be relevant to most people’s lives because they won’t be in it. See 1982.
Remember that the famous Death of Equities story in BusinessWeek showed up in August of 1979 not in the Summer of 1982. Throw in that the market was already cheap in 1979. You can find the original here.
This is not a new thesis. We will adjust our beliefs as necessary, but we do analyze markets in terms of various scenarios. Our baseline is that secular bear markets begin amidst tremendous investor enthusiasm and myopia along with corresponding bubbly valuations. We had all of that in the most extreme form ever in 2000.
Given that we believed US equities would go through the typical post bubble pattern. A long period of large declines and succeeding ascents (along with the economic volatility such eras bring with them) that would end with the conditions of a long term bull. Those are investor apathy, low valuations on low earnings and low profit margins (in marked contrast to recent periods of average to high valuations on peak earnings and profit margins) that stay low for a while. Instead of commenters justifying mid teen P/E’s on peak earings and margins as actually cheap, we will hear commenters justifying P/E’s below 10 on trough earnings and margins as reasonable in light of long term problems in the US economy to align themselves with the public mood.
More importantly we’ll go from people who are accused of ignoring good news and sticking to old ways of looking at value that don’t apply anymore (also colloquially known as one species of perma-bear along with Jeremy Grantham, Rob Arnott, John Hussman and Ed Easterling to separate us from the Nouriel Roubini’s and Robert Prechter’s of the world) to people who it is claimed doesn’t get how messed up the world is. It will be said we are doomed to endless below trend growth, irresponsible politicians, inflation (or deflation) and various other “this time is different” arguments.
We aren’t saying the market is guilty until proven innocent, we belive investment dogmatism is a sure way to lose. We will say we want strong evidence as to why we should see things differently. In the short run anything can happen, but we believe the historical fact that markets have tended to cycle from high valuations to low valuations is not an historical accident and should inform our opinions.