Trump Rally? Robert Shiller says ‘New Eras End Badly’
Do you remember the good old days when you could throw a dart on nearly any stock, mutual fund or real estate and sell it profitably? Making money so easily sure felt good and the profits made you feel so smart. Near the end of the 2000s The Los Angeles Times put it this way, “Just look at Dell Computer Corp.’s decade-leading 91,863% rise, as measured from its closing stock price on the last trading day of 1989 through December 23, 1999. That means a $5,000 investment in the personal computer maker at the start of the ‘90s would be worth more than $4.5 million today. You could have become a Dell millionaire by putting in only about a grand,” wrote Times Staff Writer, Josh Friedman on December 28, 1999.
Author Trent Hamm on March 27, 2016 wrote that his primary source for expecting stock market returns to be around 6-7% per year comes from Warren Buffett. “The Standard & Poor’s 500 Index, a benchmark for U.S. stocks, surged 18 percent a year on average from 1982 to 1999. The bull market tainted investor expectations. Polls in the late 1990s showed some investors expected to gain 14-15 percent a year. Thinking that in a low inflation environment is dreaming.” Buffett said.
December 5, 1996 is the day that former Federal Reserve Chair Alan Greenspan spoke at the American Enterprise Institute in Washington, D.C., and became famous for the “irrational exuberance” phrase that may have been coined by Nobel laureate economist Robert Shiller with his book published in 2000, “Irrational Exuberance:” noted CNBC on December 5, 2016. With the tech index known as the Nasdaq we can see that the index started 1995 at 1,224 and ended 1999 at 5,888, thanks to www.macrotrends.net. Thanks to a four-fold increase, this means a $500,000 investment would have become worth over $2,000,000. Insert the Shiller/Greenspan phrase in 1996 and you can understand why so many people were looking at the two of them as though they must be off the reservation. It wasn’t until six years later in 2002 that the same people had to look back at the two men in shock, awe, and utter respect. According to fortune.com on April 23, 2015, “The Nasdaq lost 78.4% of its value from the 200peak to its 2002 low 31 months later.” An 80% loss takes $2million to about $400,000. So the roller coaster ride went from $500k to $2m, then to $400k. Are you ready for another ride?
Check your expectations - annually
Billionaire Mark Cuban posted this message on his blog on March 4, 2015, “Ah the good old days. Stocks up $25, $50, $100 more in a single day. Day trading was all the rage. Anyone and everyone you talked to had a story about how they had made a ton of money on such and such a stock. In an hour. Stock trading millionaires were being minted by the week, if not sooner. You couldn’t go anywhere without people talking about the stock market. Everyone was in or new someone who was in. There were hundreds of companies that were coming public and could easily be bought and sold. You just pick a stock and buy it. Then you pray it goes up. Which most days it did. If we thought it was stupid to invest in public internet websites that had no chance of succeeding back then, it’s worse today. The bubble today comes from private investors who are investing in apps and small tech companies.” To summarize, Cuban submits that the market today is worse than the tech bubble of 2000.
I cannot tell you that Cuban is right. You may recall my pointing out that on November 2, 2016 Cuban said at MarketWatch that he put on his ‘biggest hedge’ ever ahead of the election on all of his equities and interest-bearing bonds. Mark Cuban isn’t a rocket scientist. Which means to me, if he can construct strategies that might limit losses so can anyone who takes the time in advance to prepare for the good, the bad, and the unforeseen. Such work becomes far more crucial when investors are taking money out every year to live.
1/1/00 – S&P at 1455.22
12/31/08 – S&P at 903.25
Annualized of -5.16%
Source: YCharts & Investor’s Advantage Corp.
1/2/09 – S&P at 931.80
12/31/16 – S&P at 2238.83
Annualized of +11.58%
Source: YCharts & Investor’s Advantage Corp.
Irrational Exuberance, Part II?
In trade publication Financial Advisor on March 15, 2017, “I don’t generally call the entire market wrong. Investors are very smart, highly motivated individuals. But I find it hard to say why stock markets are so un-volatile right now,” said Stanford University economist Nicholas Bloom, who is known for co-designing the uncertainty gauge with colleagues from the University of Chicago and Northwestern University. In the same article, Hersh Shefrin, a finance professor at Santa Clara University and author of a 2007 book on the role of psychology in markets, “the rally is just another example of investors’ remarkable penchant for tunnel vision.“ Shefrin’s points out in analogy the great 17th century tulip mania in Holland, where he notes how one rare tulip bulb was worth enough money to buy a mansion. As people were dying left and right, Shefrin says the similarity may be that, “here you have financial markets sending signals completely at odds with the social mood of the time, with the degree of fear at the time.” On weather stocks are nearing a top, Robert Shiller avoids offering his opinion, as he is not fond of making short-term forecasts. He did say, “The market is way over-priced. It’s not as intellectual as people would think, or as economists would have you believe.” He also said, “Stocks are almost as expensive as they were on the eve of the 1929 crash.” As far as his actions are concerned, he is refraining “from adding to his own U.S. stock positions, emphasizing overseas markets instead.”
As you watch the bull and the bear in a daily wrestling match right now. Before the winner is declared, let me encourage you to develop in advance your strategies for hedging, greater diversification, and active management arrangements for all things liquid.
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