Pardon me for this brief interruption in our idyllic Napa Valley summer. I must admit it gets harder to reflect on investments when the only reflection I really care to see is that of my nose in a glass of chilled chardonnay as the sun sets over the Mayacamas Mountains. However, it would be somewhat disingenuous of me to ignore the chill breeze coming from the financial media of late. Many analysts (along with a wary client or two) are sounding rather concerned. After all, the market has hit an all-time high and stock market valuations- the ones that tell us if current prices for stocks are reasonable compared to the past- are already at nosebleed levels.
It’s at times like this that mother’s words of wisdom seem to come marching in…” what goes up must come down” …it’s the “calm before the storm” …” don’t count your chickens before they hatch” and my own mother’s personal favorite… “I told you so”. Oy.
With all deference to my dearly departed mother, I must also share with you some other pearls of wisdom that provide countervailing perspectives for times like this. Most notably was one by, arguably, the 20th Century’s most famous economist, John Maynard Keynes. Shortly after being wiped out after a binge of speculative leveraged trading, he is quoted as saying: “the markets can stay irrational longer than you can stay solvent”. Indeed.
More recently, another famous economist, John Kenneth Galbraith, is said to have said that “the only function of economic forecasting is to make astrology look respectable”.
All this to say that while markets may be at peak valuations, no one knows how long the current party might continue for. We know, looking back to the turn of the last century, that market “corrections” of 10% or more have happened “on average” every year. Bear market declines of 20% or more have happened “on average” about every 4-5 years. At time of writing (knowing that markets can soon make a fool out of anyone penning something about them in advance) it is now well over a year and a half since we’ve experienced a 10% decline (January 2016) and almost 6 years since we’ve seen close to a 20% decline in the markets (August 2011). In fact, if there is one thing we can say with certainty it is that markets have been extraordinarily calm and lacking in volatility of late. In fact, over the past 30 years, markets have only been this calm and lacking in volatility just twice before; in 1995 and 2006. In both those cases, the calmness was soon shattered by much greater volatility within 1-2 years.
So, like the broken clock that is right twice a day, eventually those that are saying the party is about to end will probably, eventually, be right. Just remember to not count your chickens before they hatch and I told you so.