Hello Wendy, it’s nice to hear from you.
Hi, luxmain! I’m pleased that you enjoyed my writing.
The Control Panels have been a must-read for a long time now
I think you would enjoy the book, “Manias, Panics, and Crashes: A History of Financial Crises,” by Charles P. Kindleberger. Every bubble has a “convincing” story and they all have blow-out run-ups before they burst.
Thank you for the tip, I haven’t read that one yet. I’ll put it on the list.
Look a little further out. The 2000 bubble burst didn’t bottom until March 2003. The 2008 bubble burst didn’t bottom until January 2009. A few months ago, I thought the bottom of this bear market might be in October 2022 but now I think it may take longer since inflation still isn’t under control and the Fed is determined to quell it.
I think you’re right, and I think it’s possible, maybe even probable that we’ll see the SP500 bottoming out around 2500-3000.
The SP500 was at 2500 in March 2020, which was only a modest crash by historical standards, and also that level in December 2018, which was only a modest correction.
If we see either a very deep crash, or, a return to the valuation norms of ‘normal’ interest rates or inflationary economics, or if some unexpected shock event shows up - China? Russia? Supercovid? - then I think seeing SP500 in the 2500-3000 range is extremely possible.
I have the feeling many investors don’t worry much about the daily threats of nuclear attacks mentioned in the press, or shells landing just meters away from large nuclear power stations. I do actually worry about that a little bit.
The 2000 bubble burst didn’t bottom until March 2003.
I would argue that in one sense, the 2000 bubble didn’t stop bursting till 2009, if you look at valuations relative to earnings rather than just nominal prices.
If you look at (https://www.multpl.com/shiller-pe), the period 2003-2007 seems like a pause in a much larger decade-long mean-reversion.
And in another sense, the 2000 crash never stopped, or at least, the recovery is still to come, particularly outside the USA e.g. Spain, Italy, for example. I mean, the FTSE100 was around 7000 back in 2000, and 22 years later, today, the same - closed at 7018 today. The same with many other world indices.
In the USA - Large, high-margin, successful, world-leading, market-dominating companies like Intel, Cisco, still aren’t anywhere remotely near their peak levels of 2000… And I can think of countless banks that have never recovered to the levels of 2008 - the ones that still exist.
Some kind of long term disaster has taken place, and it has been hidden behind a tsunami of cheap or free money for more than 2 decades, ‘There Is No Alternative’, and the hyped up tech sector.
I think there is a sense in which the crashes of 2000 and 2008 overlap economically and the effects continue to this day, and now that the tsunami of central bank money is receding, the problems of the last 25 years may re-emerge from the waters and be seen to have not entirely gone away. Especially outside the USA. But I suppose I’m talking of an economic shock more than just a stockmarket shock here.
So why would I invest at SP3000-3300 - or at all! - if I believe all this?
I’m in a slightly different situation to most people on TMF USA in that I am ‘young’ (well, a good distance under 50, at least), and come from a background of poverty and do not expect to inherit much. By the time I went to university, no one among my family, extended family, or perhaps 30 closest friends, had ever bought stocks, including myself. Even ‘going to university’ was quite the novelty. I’m in Europe, not America, so the ‘cult of equity’ is absolutely not present.
Thanks to that poverty and lack of ‘faith’ in stocks, I am a very defensive investor, extremely loss-avoiding, but I caught the waves upwards in 2009, 2012, 2016, and 2020. Too much time spent sitting in cash inbetween, though, it turns out; I never believed central banks would print so much money for so long.
But I realised this year that ‘defensive’ must take on a different meaning in a time of high inflation. I do not believe central banks are acting as forcefully as will be needed to bring inflation back to 2% any time soon.
It would be life-changing for me to catch the very bottom of the market. But it will also be life-changing, in an extreme and terrible way, if I fail to catch the market at all, and end up sitting in cash during a long period of extremely high inflation.
I prefer to take the middle road. I’ll pay prices I consider reasonable assuming a wide range of possible economic futures, and I’ll rebalance to exploit bargains, if the market keeps dropping after I buy. Berkshire is a wonderful thing to have in the toolkit, in that regard.
One other comment, regarding crashes, just while it’s in my head.
The drop in the US market looks extremely strange when viewed from outside the US right now. Here is the S&P 500, priced in pounds - click ‘YTD’. You may have difficulty spotting the ‘crash’. The pound is absolutely not the only currency that has this perspective - yen, australian dollar, norwegian kroner, korean won. To some degree, the euro. Take your pick.