The S&P 500 has achieved a significant milestone this year, marking its 50th record high.
American companies are outshining the stock market as never before. The 500 entities within the S&P 500 account for almost half of the globe’s overall market capitalization. (Chart by SRP) pic.twitter.com/XBYtZTdp6M
— Holger Zschaepitz (@Schuldensuehner) November 23, 2024
The market has surged by an impressive 24%, prompting some analysts to ponder whether this prosperity will endure or if a decline is imminent. Macro strategist Henry Allen highlights that the S&P 500’s CAPE ratio, a gauge for market valuation, has only surpassed current levels twice in the past century.
This raises concerns that the market could be overvalued. Allen makes comparisons between today’s market and three historical instances of high valuations.
“I tend to favor a bull market that ascends a wall of anxiety. When everyone is in the water, I start to feel uneasy.” 🏊 – @awealthofcs https://t.co/CbYAQnR0HN
— The Compound (@TheCompoundNews) November 23, 2024
During the late 1990s dotcom boom, the S&P 500’s value tripled over a span of five years, only to then enter a prolonged correction phase.
The market experienced three consecutive years of downturns, a phenomenon not encountered since World War II. Prior to the financial crisis of 2008, market conditions appeared stable, characterized by low volatility and narrow credit spreads. However, the crisis demonstrated that calm periods could precede significant financial turmoil.
As the stock market transitions into a typically favorable short-term seasonal phase, this may have consequences for short-term traders, cash-sitting investors, and those considering reducing their stock allocations, as @jaykaeppel elaborated in a recent article. pic.twitter.com/suVg6rubz0
— SentimenTrader (@sentimentrader) November 22, 2024
Following the initial jolt of the COVID-19 pandemic in 2020, the markets rebound rapidly in 2021, spurred by substantial monetary and fiscal stimulus.
The achievement and ensuing market caution
Valuation levels became excessive, resulting in a significant selloff in 2022 when the S&P 500 plummeted 25% from its apex. Allen remarks that in each of the three previously mentioned scenarios, the space for additional gains was minimal due to already high valuations. Each episode was succeeded by substantial corrections.
A key similarity among these instances was the “bubble mentality,” where confidence in ongoing prosperity bred complacency. Economist Hyman Minsky’s hypothesis posits that lengthy periods of stability can encourage risk-taking and complacency, potentially paving the way for future instability. Recent developments indicate that Alberta is experiencing greater inflation than the rest of Canada, partly attributable to a robust housing market.
The core inflation rate in Alberta stands at 3.3%, significantly exceeding the national average of 2%. As the S&P 500 navigates these historical trends, investors are counseled to maintain vigilance. The overarching conclusion, as evidenced by past market behavior, is that substantial corrections frequently follow episodes of rapid gains and inflated valuations.
Henry Allen’s insights imply that while achieving new records is certainly a reason to celebrate, acknowledging the likelihood of sudden market shifts is equally crucial. The interplay of historical trends and contemporary economic indicators could herald the necessity for prudence amid apparently unstoppable growth.
