Notes, Views, and the Occasional Provocation
November / December 2017

U.S. stocks have risen for over eight-and-a-half years, continuing to defy cynics who’ve called it a “bubble” all along the way.

Stocks will eventually turn, and the end of this latest run may well come tomorrow. But asset-price bubbles are harder to identify than most people imagine, and diversified long-term investors would do better to heed Winston Churchill’s advice: “I am an optimist. It does not seem too much use being anything else.”

Here’s to a healthy, happy end of the year to you and to yours.

Best regards,

Milo Benningfield


Stocks Are Up, Is Now a Good Time to Invest?
Microwave ovens, color t.v.’s, and a cabinet stereo in the living room. Computer chips, LED lights, commercial satellites, and a precursor to the Internet. Name the decade that brought these things to life. It was the 1960’s, a golden age of electronics.

This golden age also brought us a stock-market bubble to rival all bubbles on the heels of the Cold War space-technology race. During the so-called “Tronics Boom,” companies of all stripes saw their stock prices skyrocket if they added suffixes like “tron,” “tronic,” and “sonic” to their name, since investors were eager to scoop up any opportunities associated with electronics. Alongside General Electric and Texas Electronics, we suddenly had Astron and Dutron, Videotronics and Electrosonics, and even a cleaning company called Powertron Ultrasonics. A short time later, the upstarts’ prices collapsed, their stocks trading at 10% their former levels.

In the 1990’s, market history repeated itself with every sort of company adding dot-com to their names to capitalize on the Internet-stock frenzy. Never mind that many of the companies dropped the suffix after the bust. Today, the name-change playbook is being used again with cryptocurrencies. After a 1,000% Bitcoin price increase this year, “blockchain,” the underlying technology, is this year’s Pantone color. The biotech company formerly known as Bioptix recently emerged from its makeover as Riot Blockchain and promptly saw its average daily trading volume jump from about zero shares to more than 10 million a day.

It doesn’t seem to take a genius to tell us when a new bubble has arrived, does it? We don’t need an economist to tell us that asset prices have risen above levels justified by “economic fundamentals.” When Riot Blockchain crashes (not “if,” right?), it will be easy to say we saw it coming.

But if bubbles, like drinking too much champagne, seem obvious in retrospect, they’re notoriously difficult to pin down in advance. One expert’s “speculative mania” is another’s “bull market,” and much ink has been spilled laying out the respective arguments, often quite convincing in either direction.

The most recent bubble-bull argument has been playing out over more than eight and a half years, ever since the S&P 500 Index hit its low in March 2009 during the Great Recession:

S&P 500 Index*,
January 1, 2007 – December 11, 2017

*S&P 500 Index excludes dividends. Past performance of the S&P 500 Index is no guarantee of future performance.

Eventually, this bull, too, will end. But figuring out the triggers and when exactly they’ll happen will be, to put it mildly, difficult. Stock prices collect thousands of investor preferences, expectations of profit, risk assessments, and other factors. Figuring out what event or amalgam of factors will spook the investor herd to run for the exits is akin to predicting the next earthquake.

Even if we can’t identify where we might sit on the continuum of Bull to Bubble tomorrow, does the market hitting new highs argue for caution today? As we’ve been advising clients, now is as good a time as any to raise cash for short-term needs.

But as for where the market will head next after hitting a new high, it’s a coin flip to guess whether it will be higher or lower a year from now. From 1926 to 2016, the S&P 500 Index was just as likely to be positive a year after hitting a new high as it was to be positive after hitting any other price level. In other words, there wasn’t any actionable information for investors from a new market high alone.

The market hits lots of new highs over time, with starts and stops and, yes, the occasional bear market or crash in between. It’s this volatility, more than a new market high that puts most investors at risk. Fortunately, prudent investing is not an all-or-nothing proposition. It’s a calculated hedge across different types of assets, knowing tomorrow will likely favor first one, then another as different economic conditions prevail.

For this reason, the room where pragmatic, long-term investors sit is quiet compared to the noise of the trading pit, where proverbs like “Buy low, sell high” and “Don’t catch a falling knife” fill the air. They know that diversification plays out over decades, not months and years, and implement their investment strategies accordingly.

Thank you for reading.

Best regards,

Milo Benningfield

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