Iconic investor John Templeton once famously said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." Last week, we talked about pessimism, skepticism and optimism; this week, let’s talk about euphoria.
By nearly every metric used by analysts stocks are no longer cheap, momentum has slowed and at least one of the tailwinds to this market, tax reform, looks like it may underdeliver. Despite this, the market continues to reach new highs on a regular basis. While it would be nice to sit back and enjoy this time, we as investors still need to wonder about what comes next.
Much about the world economy remains in a sweet spot. Economic growth has accelerated with two sequential quarters of plus 3 percent growth in the U.S., and it seems a true recovery in Europe. Interest rates, while off record lows, remain remarkably low by historical standards and the movement against the innovation killing culture of regulation in governments around the world is well underway. Yes, with unemployment at ultra-low levels and the stock market at all-time highs, life is good for many.
At the same time, innovation is also occurring in western economies at a rapid pace. Artificial intelligence, electric vehicles, Elon Musks’ Hyperloop concept, robotics and on-demand manufacturing all portend to an exciting future of opportunity.
The stage is well set. Enter the euphoria.
I believe the last true euphoric stage in stocks occurred between December 1998 and March 2000. I know some might ask, “but Marc what about the end of the 2007 bull market, didn’t that end in euphoria?” My answer is it did, but the euphoria was in housing and credit markets, not stocks, which was unique to the financial crisis and why it was even harder for most investors to discern at the time.
What I describe as the December 1998 to March 2000 euphoric period, followed the April 1997 to July 1998 “optimism” part of the bull market cycle that saw markets rise approximately 50 percent over 15 months. After four years of almost uninterrupted gains, a four-month correction driven largely by a financial crisis in Asia occurred from July to November 1998. During the crisis interest rates were cut, clearing the way for euphoria. The resulting euphoric period is now referred to as the dot.com bubble. We all know now how it ended.
While the board is set somewhat differently this time, I believe the parallels are uncanny. While the behavior of this market cycle will certainly not match previous cycles, it will be important to be aware of the existence of a cycle in general as we invest going forward. Market cycles tend to end in euphoric excess; do I think we are there yet? No, I don’t. Do I think these conditions could emerge in the foreseeable future? Yes, I do.
There’s another story about a famous investor that also comes to mind. In 1929 while on his way to the office, Joe Kennedy, the patriarch of the Kennedy clan, stopped for a shoe shine. During the shine, the shine boy chimed away about all his stock tips. Mr. Kennedy mused, if the simple shine boy was giving stock advice, maybe the stock market was overheated. He sold his positions and decided to play the market actually going down. His fortune was created, and the rest is history.
It may soon be time to start keeping an eye out for some modern-day shoe shine moments of our own.