The Folly of Linking Market Falls

 | Nov 06, 2013 | 11:00 AM EST
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The opinions are coming in: this market is not like 1999, we are not in bubble territory and valuations appear saner. Perhaps these notions are all indeed true.

But it's an incorrect and dangerous conclusion to evaluate the overall state of the U.S. stock market by comparing it relative to other moments in market history to argue why it is different this time. 

The 1973 bear market was different than the market collapse of 2000 which itself was different from the market collapse of 2008. In the 1970's, it was the blue chips -- the so called Nifty Fifty – which were trading at heavenly levels and which caused investors a great deal of pain. At the turn of the century it was the undeniable support for anything dot com that caused problems. In 2008 it was the sudden decline in housing prices. In way, all these market pullbacks were different. But that viewpoint is a granular one.

What 1973, 2000, 2008 all had in common was a undeniable attraction to an asset class merely because prices were going up. Capital starts competing with other capital in order to stay in the game. When this wonderful nearly five-year bull market stops charging forward, and the bear takes over, it will be because of the same overall reason -- greed. It is greed that leads to a market excess that simply can not be sustained indefinitely.

I'm not suggesting that this current market is tip-toeing on the edge of the cliff. I'm saying that investors and any market participant should be careful to assume that because this market is different from others that it is indeed a different environment. Just because blue chips are not trading at 40x to 50x earnings, names like Google (GOOG) and Apple (AAPL) are not trading for 100x earnings. Just because houses are not being bought and sold like baseball cards doesn't mean that all is clear. Bubbles can and do manifest in various and even never-before- seen forms.

There is absolutely no doubt today that the expected return of stocks on the future is far less attractive than it was 12 months ago, two years and three years ago. Starting points matter and today's starting point is significantly higher than it was then. To the extent that interest rates remain where they are, stocks are attractive.

There some intriguing spots out there: you can now own Potash Corp (POT), one the largest and most efficient fertilizer companies in the world, yielding 4.5%. The industry is undergoing a massive pricing shift, which will undeniably affect future cash flows, but Potash will most likely emerge a victor once the dust settles.  

Investors should not, however, form future expectations based on the current mood. After more than four years of unwavering market advances, this is time when folks start differentiating the market from past others and that is a dangerous assumption to make. Bubbles, in the sense that they all eventually burst, are never different.



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