Last week’s stock market thunder has added new urgency to the conversation about the possibility of a developing stock bubble.
While that might get clicks and shares on social media, the tailwinds driving this bull market remain in place. The Fed is guiding interest rates lower. Global central banks are doing the same. Company profits remain largely on track. Credit spreads (the difference in yield between high and low quality bonds) are narrow. Even deficit spending counts as a tailwind.
However, while these arguments support continued price appreciation, they can also contribute to a melt-up scenario in which valuations are already historically and statistically over-extended. Almost every major asset class is hitting all-time highs at prices reflecting heavy premiums. Hence, some thoughtful caution is warranted.
First, accurately timing a market peak is 100% luck. Read that sentence again. One especially amusing example was that three days before the 1973 U.S. peak, Time magazine ran an article highlighting the beginning of a gilded age! A new market high did not happen for nine years.
Seven epic bubbles have unfolded over the past 100 years. The U.S. in 1929, 1973, 2000, and 2007. Japan in 1989. China in 2007 and 2015. All of them show that time and hindsight were needed to identify a peak. No one knows they’re happening in real time.
So, what’s an investor to do? Three things will keep you sane:
- Mind your asset allocation policy. Stay in your lane.
- Make changes incrementally over time. Avoid sudden “all-in” or “all-out” bets.
- Build ready cash or short-term bond resources. Liquidity is your edge in a downturn.
Age group and generational demographics help shape strategy. There are Youngs, Middles, and Olds.
👉Youngs are under age 40. They are building personal capital through career development and financial capital through saving and investing. In hindsight, every market downturn, without exception, has been a golden opportunity to buy quality assets “on sale.” Their job is to hold their noses and continue to invest aggressively in all market conditions. Full stop.
👉Middles are between 40 and 70. This group has reached full development of personal capital. They’ve built a base of financial capital. Sooner or later, they retire. This is the most challenging age group. There’s an inclination to press hard to maximize retirement savings, but in doing so, may expose themselves to significant declines and limited time to ride the eventual recovery. Recoveries after full blown bubble collapses can take several decades.
Careful planning needs to take place in these years. Contact us if you or someone you know is in this age group and they’re trying to wing it or just hoping for the best.
👉The over 70 Olds tend to already be more conservatively positioned, so market trends have less of an impact on them. However, the news background during declines is always troubling. This causes people to think about doing potentially regretful things like going to all-cash or buying an annuity.
Please contact us if any of this raises questions or concerns for you. We were made for these times.
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
Evidence-based. Rules-driven. Policy-focused.
