Don't You Think the Stock Market Bubble is About to Burst?

John Robinson |

Since the Dow crossed 30,000, I have been getting this question quite a bit. Before I opine, here is an excerpt from a 2019 interview with an even more credible source than I, Nobel Prize-winning economist and father of the Efficient Markets Hypothesis, Gene Fama -

These days, people spy all kinds of bubbles, ranging from the stock market to cryptocurrencies to corporate debt. They’re wrong, though, to think they can detect the next disaster, according to Eugene Fama.

I encourage all FPH clients to read the full interview:
You Can't Spot a Bubble, So Don't Even Try, Says Eugene Fama (Chief Investment Officer, Nov. 2019)

Previous Market Trends

"But 30,000!?" people ask. "That is such a huge number for the Dow.”  True, it was just 18,000 last March (the nadir of the fear-driven pandemic decline), and it was just 6,500 little more than a decade ago in March 2009 (the bottom of the bear market caused by the 2007-2009 financial crisis). I have written about this before and have noted that such historical comparisons provide textbook examples of a form of cognitive bias called Anchoring.

To add a little bit of counter-perspective, some readers may be surprised to learn that the period from 2000-2019 marked the worst 20-year stock market investment environments since the Great Depression. Over this period, bonds actually outperformed stocks! To make this more tangible, the Dow crossed 10,000 for the first time in 1999. If we anchor from that peak, at a return of just over 7% per year (doubling every 10 years), the Dow should sit today at around 40,000 – and that return would have represented a return well below the historical 10-12% mean long term return for the stock market.

Of course, fear sells, so the headlines lately are filled with predictions of doom and gloom from academically/professionally credible, but perpetually bearish, sources.  Last June (2020), I illustrated in an FPH Blog post how Nobel Prize-winning economist, Robert Schiller has been calling for a bear market every year for nearly a decade. See Nobel-Prize Winning Economist Provides Support for Broken Clock Theory.

Approaching Market Predictions With Caution

A few weeks ago, a client sent me a headline noting that famous portfolio manager Jeremy Grantham was predicting a severe bear market for 2021. This was my response:

“Jeremy Grantham is predicting a bear market??? ??? This is too funny.  I need to catch my breath so I can type.  See Mr. Grantham's proclamations below -

Grantham’s Bear Market Call Tests Patience of GMO Fund Investors (2020) 

Why is no one listening to Jeremy Grantham?  (2018)

Jeremy Grantham Forecasts Rough Seven Years For Equities (2018)

Uh-Oh! Stock Market Perma-Bear Jeremy Grantham Capitulates (sort of) (2017)

Jeremy Grantham Warns 2013 Will be a Dangerous Year for Stocks (2013) [Note: The S&P 500 rose 32% in 2013!!! ]

Jeremy Grantham Turns Bearish on Equities (2011)

Grantham is credited has having predicted the 2000 and 2008 bear markets.  In truth, he was bearish long before both bear markets.  Ironically, his most impressive and completely legit market call was his 2009 proclamation that it was time to get back into the stock market in a big way.  However, enthusiasm over his prescient bullishness should be tempered by the fact that he was back in hibernation by 2011.

None of this discussion is intended to suggest that we will not experience another painful bear market. Every day that passes we are closer to that reality, just as we are one day closer to death. The way we prepare for a bear market, however, is not by trying to predict the timing of its arrival or the timing of our exits and entries from the stock markets, but rather to plan and prepare in advance with sound portfolio construction so that you are not forced to sell to meet your expense needs during that period.

I would like to think this approach worked pretty darn in terms of helping clients manage the stress and expectations through the major bear markets we have experienced over the past few decades, including last March when the stock market lost 37% of its value in a single month. I would like to think it will serve us well in any future bear market as well.

John H. Robinson is the founder of Financial Planning Hawaii and a co-founder of software maker, Nest Egg Guru  

DisclosuresSecurities offered through J.W. Cole Financial, Inc. (JWC) member FINRA/SIPC. Advisory services offered through Financial Planning Hawaii and J.W. Cole Advisors, Inc. (JWCA). Financial Planning Hawaii and JWC/JWCA are unaffiliated entities. 

Fee-only financial planning services are provided through Financial Planning Hawaii, Inc, a separate Registered Investment Advisory firm. Financial Planning Hawaii does not take custody of client assets nor do its advisers take discretionary authority over client accounts. 

The information contained herein is general in nature. Neither Financial Planning Hawaii nor J.W. Cole provides client-specific tax or legal advice. All readers should consult with their tax and/or legal advisors for such guidance in advance of making investment or financial planning decisions with tax or legal implications.