Seems like we've been here before...
Six years ago today, with the S&P 500 around 1460 - having risen 20% without a correction for seven months - a handful of Wall Street's best and brightest joined CNBC's Larry Kudlow and Bob Pisani to discuss the Goldilocks economy, why the bears are wrong, and where the market is going next. Sometimes, we just need a reminder to snap us out of that recency bias... for example, Bob Pisani: "We have got a global rally going on... and the important thing is... there's a floor to the market - every time, for the last seven months, they sell the market down for 2 days, it comes right back."
Ralph Acampora: "I'm bullish, but I don't think I am bullish enough...there's new leadership"
Larry Kudlow: "Goldilocks kicks some more butt and the bears of the last four years are wrong... as they climb the 'wall of worry'"
Bob Pisani: "Transports have been rallying - as the disaster that the bears keep talking about hasn't happened... When you are in a global expansion like this, to sell...is foolish."
and our favorite:
Bob Pisani: "People who keep talking about this real estate bubble don't understand... there are 3 things that bring down real estate markets: 1) the economy falls apart, 2) liquidity is withdrawn, and 3) supply overwhelming market - NONE of that has happened."
...from Dr John...
“One ought to become concerned about risk when investors become convinced that it does not exist. There are certainly times when it appears easy, in hindsight, to make money in the stock market. The difficulty is in keeping it through the full cycle. The fact that over half of most bull market advances are surrendered in the subsequent bear doesn't sink in until after the fact. It's all fun and games until someone gets hurt.
“If the parents or the children of Wall Street analysts were to ask for wise investment advice, would the first thought of these analysts really be to encourage stock purchases at a multi-year market high, in a long-uncorrected and strenuously overbought advance, at a multiple of over 18 times earnings on unusually wide profit margins, with wages and unit labor costs rising faster than inflation, while interest rates are rising, bullish sentiment is unusually high, and corporate insiders are selling heavily? Would the potential for further gains in that environment exceed next inevitable correction by an amount that would make the net gains worth the risk? Would they encourage using trend-following systems in an overbought market, even though a decline to simple moving averages already implies substantial losses?
“Uncorrected market advances give a voice to the idea that ‘this time it's different.’ They invariably produce alternate valuation measures (like EBITDA multiples in the 90's, or price/forward operating earnings today) to replace the ones that suggest stocks are overvalued. These new-era arguments prevail despite the fact that the most recent evidence; the most recent market cycle; confirms the relationship between rich valuations and unsatisfactory long-term returns.
“No. We've been here before, and the consequences – though not always immediate – have invariably been bad. There is not a single instance in historical data since 1871 when the S&P 500 traded above 18 times record earnings and there was not a low a year or more later that erased every bit of advantage over Treasury bills. Not one.”
It’s All Fun and Games Until Someone Gets Hurt – February 5, 2007 Weekly Market Comment
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