This time is different!
This time is different!
Anecdotal evidence. Dismissed as mostly irrelevant, anecdotal evidence becomes useful often only in hindsight. Until then, it’s a novelty, statistically unsound, unreliable, lacking objectivity and unverifiable.
But boy, it’s fun to inquire.
That was then
In the 1920s, the stock market was ‘roaring’, enjoying widespread optimism and even euphoria amid new innovations. On October 15, 1929, after the market had experienced a nine-year rise, the first celebrity Yale economist, Irving Fisher, gave a speech in New York City.
The speech was in response to the prediction of a market crash by financial expert Roger Babson. Known as the “Babson Break,” an initial stock market decline in September 1929, viewed by many investors as a “healthy correction”, followed the warning from Babson.
Fisher’s speech was reported by the New York Times on October 16, 1929.
“Stock prices have reached “what looks like a permanently high plateau,” Irving Fisher, Yale economist, told members of the Purchasing Agents Association at its monthly dinner meeting at the Builders Exchange Club, 2 Park Ave, last night… After discussing the rise in stock values during the past two years, Mr. Fisher declared realized and prospective increases in earnings, to a very large extent, had justified this rise, adding that “time will tell whether the increase will continue sufficiently to justify the present high level. I expect that it will.”
“While I will not attempt to make any exact forecast, I do not feel that there will soon, if ever, be a fifty or sixty-point break below present levels such as Mr. Babson has predicted.”
“While the tone of his address proper reflected a moderate optimism, in the informal questioning which followed Professor Fisher fell into almost unqualified optimism. In reply to one question, he declared that he expected “to see the stock market a good deal higher than it is today, within a few months.”
Fishers’ comments are remembered as one of the most notorious and inaccurate market forecasts in history. Just nine days later, beginning on Thursday October 24 and then on the following Monday and Tuesday, the Dow Jones had fallen a quarter. The glamour stocks of the age saw their values plummet.
By the end of the weekend of November 11, 1929, the index had plunged 40 per cent from its September high. The Dow Jones had lost just shy of 90 per cent before finally bottoming out in July 1932
This is now
Today, U.S. stocks are riotously expensive when viewed from a historical perspective. The S&P 500 market-cap-to-Gross Domestic Product (GDP) ratio hovers near multi-year highs. The Price-to-Book, Price-to-Operating Cash Flow, and Enterprise Value-to-Sales ratios are at fresh highs. Indeed, the S&P 500 Index is trading at statistically rich levels based on 19 of 20 in-house metrics tracked by Bank of America, with four hitting all-time highs. Meanwhile, the S&P 500 is now trading at the highest forward price-to-earnings ratio (P/E) we’ve seen since the depths of the pandemic, and that valuation, which is far above historical norms, prices in a lot of anticipated good news.
But this time is different, according to today’s celebrity experts.
In a note penned on September 24 by Bank of America’s (BofA) Savita Subramanian to clients, “attributes inherent in the current mix of members – including less financial leverage, lower earnings volatility, increased efficiency and more stable margins than in decades past – help to support the towering valuations.”
In words akin to those of Fisher’s infamous 1929 ‘permanently higher plateau’ pronouncement, Subramanian, BofA’s head of equity and quantitative strategy, writes, “Perhaps we should anchor to today’s multiples as the new normal rather than expecting mean reversion to a bygone era.”
This week, the S&P 500’s 12-month forward price-to-earnings ratio hit 22.9, a level exceeded just twice in the 21st Century, during the dot-com bust and the pandemic rally in the summer of 2020. But in 202 the Federal Reserve reduced interest rates to near zero. Today’s rates are far from zero and not expected to return there.
Speaking of the Fed, Chair Jerome Powell noted in a speech this week that by many measures, equity prices are “fairly highly valued.”
Despite the stretched valuations across many measures, Subramanian wrote today’s index has a higher-quality makeup than prior decades, and may be better set up for success, adding in another comment akin to Fisher in 1929, “Buying stocks at these multiples feels bad,” but a boom in sales, earnings and GDP would “resolve this seemingly untenable situation” by justifying those pricey levels.
Other analysts are also channelling Fisher. The Sevens report, for example, notes, “But when talking about forward valuation of the S&P 500, it’s critically important to recognise that the ballooning influence of the mega-cap tech stocks has altered what’s considered ‘normal’ ranges.”
Ahhh, you gotta love anecdotes.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
