“You can’t time the market.”
That’s what you always hear from value investors and even professionals who are asked to give advice to newbies.
And it’s largely true, at least as it concerns you: you cannot hope to time the market like the professionals do.
But the thing is, market timing is extremely important. It can make or break your entire financial future.
A person’s prime years for investing in the stock market are from 18-65; the time they become an adult to the time when most people retire. Now, obviously there are people who start investing before they turn 18, and that’s great, but for most people, the earliest they can get into the market is around 18.
For a lot of people, they really begin investing around 22. You go to college, graduate at 22, get a job and career and the steady income that comes with it, and you begin investing your money in the market, hoping to build up a nice retirement fund over the course of the next 43 years.
So basically the average person has between 43-47 years of a prime investing window in which to make money, put it in the market, and hope it grows over time so that they have enough to retire off of by the time they’re 65.
If you look at the chart of the stock market over the long term, going back 100 years or more, you can see that the trend is clearly and undeniably up.
That chart goes back to 1897, and the clear takeaway is that if you simply buy stocks and hold them for the long term, you will make money–lots of money. The Dow Jones has appreciated by over 153,000% since 1897.
As they say, “Time in the market beats timing the market.”
However, it’s not that simple. Remember what we said about the fact that the average person has a prime investing window of between 43-47 years. Let’s split the difference and call it 45 years.
This chart goes back 125 years, so due to mortality, you’re not going to be able to capture all these gains.
And while the market has clearly gone way up over the long term, if we start looking a little closer at the chart, we can see that there are periods where the market goes nowhere. Long periods, in fact.
Because the average person only has a window of about 45 years to make money in the stock market, the time you were born makes a great deal of difference in how much money you will actually make from investing in stocks.
In other words, there’s a lot of luck involved.
Consider that in 1898, the Dow Jones was at 43.
34 years later, in 1932, the Dow Jones was at 43.
An 18-year-old who begins investing in 1898. Let’s just for simplicity’s sake say he bought a mix of large cap stocks that more or less tracked with the performance of the Dow.
By 1929, when this person was 49 years old, his stock portfolio was up over 900%. Pretty stellar returns–an average of 29.6% a year, although most of those gains would’ve come during the 1921-1929 period, the “Roaring Twenties.”
But starting in 1929, the market would enter into the worst crash in American history, and by 1932, it had fallen nearly 90% from its 1929 peak. Our investor would now be up a measly 23% from where he bought into the market all the way back in 1898, assuming he didn’t sell his stocks at any point during the crash.
He is now 49 years old and his stock portfolio has basically gone nowhere over 31 years.
Now this may seem like an extreme example, but there are many periods we can look at in the history of the stock market where there were little to no gains to be had over many years.
- If you bought stocks at the 1929 peak (and a lot of people did), you would have seen your portfolio nearly destroyed over the next 3 years. If you managed to hold on and not sell, you would not have seen any gains in your portfolio until 1954. 25 years of nada.
- Let’s say you were born in about 1940 and bought stocks starting in 1961. Your portfolio would have gone nowhere until 1982, 21 years of zero gains.
- If you were born in the early 1980s, and you invested in the market when you turned 18 right around the peak of the Dot Com bubble in late 1999, you would have seen no gains at all until 2012.
Conversely, there are people who were born at perfect times that put them in position to capitalize on some tremendous bull runs in the market.
- Someone born in the early 1960s who began investing in the early 1980s would have seen phenomenal returns over the next 18 years or so. From 1982-2000, this person’s portfolio went up over 1200%. Now, the next 10 years would have been rough with the Dot Com collapse and then the Global Financial Crisis of 2008, but if he had just held on through those rough patches and bought the dip, he would have been fine. Even at the bottom of the Dot Com crash bear market, his portfolio was still up over 860% since 1982. And he was still up over 760% in early 2009 at the depths of that bear market. Today in 2022, he would be up over 4000% from where he started in 1982. This person would now be nearing retirement, and would probably be in a very conservative portfolio with the objective of preserving wealth given that the finish line is within sight. He’d be in great shape to retire at some point in the next 5 years or so. If he picked the right stocks back in the 1980s (for example, Microsoft, which is up 300,000% since 1986) then he would be extremely wealthy today.
- Another great time to have been born was around 1930. Sure, you’d grow up in the Depression, and then World War II, but by the time the war was over and you started investing, let’s say around 1949, you would have seen your portfolio go up over 500% by 1966. Now of course the market traded sideways from the mid-1960s until 1982, and you wouldn’t have seen any gains in that period, but the period from 1982-2000 was probably the greatest bull run in US history, as we just went over. All told, if you had invested starting in 1949 and held until you were 65, by 1994 your portfolio would have been up over 2000%. And if you held on until 2000 when you were 70, you would have been up 6000% from where you started.
- Someone born in the late 1980s or early 1990s who began investing around 2009 would also have seen some phenomenal returns over the past 13 years. From the 2009 bottom, the Dow is up about 400%. What comes next, though, is anyone’s guess.
And that’s the real problem here: over the course of stock market history, periods of great returns are usually followed up by periods of zero returns, or even negative returns.
There was the 1966-1982 period of zero returns.
But the worst case scenario is a long period of negative returns.
Someone born around 1910 who began investing around 1928-1929 would have almost immediately been crushed in the 89% market crash, and his portfolio would have been deep underwater until 1954. He probably would have lost his job during the Depression and not had any extra money to buy stocks at the bottom of the crash in 1932.
When you look at things this way, the fortunes of an entire generation are based heavily on the performance of the stock market. Some generations are born at a time where they are positioned to make great money in the market, and some are not. People born in the early 1960s have had tremendous success in the market over the past 40 years or so.
But the generation born around 1910 who started investing at the peak of the Roaring Twenties bubble did terribly in the market over the course of their adult lives, and it’s largely based on luck. It’s all based on whether you were born at the right time.
However, it’s not all based on luck. Surely there were people born around 1910 who were blessed with great instincts and financial savvy, and were able to detect that the stock market was in a tremendous bubble by 1929, and wisely kept their money out of the market. These people were then able to buy in at the bottom in 1932 or 1933, when the crash had ended, and they did very well for themselves.
They tell you not to try to time the market, but we see that those who are able to do so can both avoid financial ruin, and capture massive portfolio gains.
The question before us today, then, is, after 13 years of stellar gains in the stock market, is it wise to be invested in the market going forward?
Over the past 100 years, there have been 4 great bull markets:
- 1921-1929 (485%), 8 years.
- 1949-1966 (483%), 17 years.
- 1982-2000 (1402%), 18 years.
- 2009-present (473%), 13 years.
We have no idea when the current bull run in stocks will end. History doesn’t really give us a good indication of how long these secular bull market cycles generally last. We shouldn’t expect it to last much more than 17-18 years, but then again, it could well last longer than that.
But it could also end tomorrow. We just don’t know.
And the other question before us is whether this secular bull market will end with a period of sideways trading, like what followed the 1949-1966 bull market, or if it will be a period of negative returns, like that which followed the 1921-1929 bull market.
If the market is simply going to take a break and trade sideways for the next 15 years or so, that’s one thing. But if we are going to see another 1929-style market crash, then that is a major concern.
But how would we ever know what lies ahead? How can we predict whether the market is going to crash spectacularly like 1929, or whether it will simply plateau like it did starting in 1966?
In my view, we have to look at stock valuations. We have to see how expensive the market is relative to corporate earnings. Market valuation metrics do not tell you how to time the market, at least in the sense of predicting an imminent market crash or the beginning of a massive bull run, but they can tell you type of returns you can expect out of the market going forward.
The metric I like for market valuations is Robert Shiller’s Cyclically-Adjusted Price to Earnings ratio, or the CAPE ratio, or, simply, the Shiller P/E of the market. Shiller’s data on stock valuations goes all the way back to 1870, and it shows us how expensive or cheap stocks are at a given time:
We can see, unsurprisingly, that stock valuations are extremely high right now. The only time valuations were ever higher was in late 1999 and early 2000 right at the peak of the Dot Com bubble. Valuations have come down a bit over the past couple of months with the market selloff, but they remain extremely high compared to the past 150 years or so. Stocks today are just about as richly valued as they have ever been before in US history.
Prior to the 1990s, a Shiller P/E ratio of 20 or above represented the danger zone for the market. Anytime valuations got above 20, you were flirting with disaster by staying invested in the market.
Had you bought stocks around 1900, when the Shiller P/E was over 20, you would have seen zero gains until about 1915.
The tech bubble (and the era of low interest rates and QE) redefined the term “overvalued stocks,” as we can see. If stocks were considered overvalued in 1900, 1929 and 1966 when they had a Shiller P/E valuation of between 24-30, then by the late 1990s, stocks were beyond overvalued–they were completely and utterly detached from reality altogether. Stocks were ludicrously overvalued.
And they’re back at those levels today.
Of course, it is certainly possible for stocks to push to even more ludicrously overvalued levels. After all, up until the late 1990s, the most overvalued stocks had ever been before was in 1929, but stock valuations in the late 1990s far surpassed the levels seen in 1929.
The same can happen today. Stock valuations could very well push up even higher than they were in the late 1990s. It’s entirely possible.
But that’s just the problem: if you’re betting on stocks for the long term right now, what you’re essentially saying is that you believe stocks will advance to and even beyond the most ridiculously overvalued levels in American history. That’s your bull case.
Is that really something that sounds like a good idea?
The people who preach “long-term investing” often characterize it as a morally superior way of investing–it’s based on the virtues of patience, discipline and dedication, unlike trading, which is based, they say, on greed and impatience.
But I don’t know, maybe it’s just me, I’d say you’re pretty greedy to be buying stocks right now, at these valuations, and expecting strong future returns.
You’d also be impatient, too. Why not simply wait until stock valuations come down to buy into the market? Wouldn’t that be a better long-term strategy–to buy stocks when they’re cheaper?
The past two times stocks hit a Shiller P/E valuation of 30 or above (1929, 2000), the result was a disastrous and spectacular crash. The Dow dropped nearly 90% following the 1929 peak. And while the Dow didn’t fall all that much after the 2000 peak (35%), the Nasdaq, which was more representative of the ongoing Tech Bubble and the main reason stock valuations were so high at the time, fell nearly 80%.
Why should we expect things to be any different this time?
I think most people, deep down, know this market is going to crash spectacularly at some point, and that we’re probably closer to the spectacular crash than we are to the start of the bull run.
In 2020, Advisor Perspectives conducted a study on the relationship between the market’s Shiller P/E ratio and forward returns, and what they found was that the higher the Shiller P/E ratio, the lower the expected forward returns. To briefly summarize, a Shiller P/E of about 15 would carry with it an expected forward return of about 12% a year for 10 years. But a Shiller P/E ratio of 30 means you can only expect about 5% average returns over the next 10 years. And again, that’s on average over 10 years, meaning you’ll average about 5% gains for the next 10 years. There could be some very nasty declines in there, followed by some sharp gains after the market rebounds.
At the end of 2021, the Shiller P/E ratio for the market stood at about 40, and according to Advisor Perspectives, stock valuations that high carry with them expected forward returns of about 0% going forward.
In other words, at these valuations, investors should not be expecting much more upside. The party is just about over.
To me, the risk-reward proposition offered by stocks at the present moment seems heavily skewed toward the risk side. People have about a 45-year window to invest in the markets, at best. Stock valuations right now are pointing toward 10 years of zero returns.
Can anyone really afford that? Can anyone really afford to basically make no gains in the market for nearly a fourth of their 45-year prime investing window?
It feels like stocks could begin the crash at any moment, and as history shows us, when the crash begins, things cascade quickly.
We know that panic can set in quickly in the market, and cause stocks to fall dramatically in a short period of time. In March 2020, when Covid hit and the lockdowns began, the stock market fell 35% in less than a month. That’s how quickly it can happen.
Once the Roaring Twenties bubble burst in September 1929, the market fell by nearly 50% in just two months.
The Nasdaq bubble bursting saw stocks fall 40% over a two month span starting in March 2000.
It happens very quickly. Most people think they’ll be able to get out before the crash begins, but they’re often caught with their pants down when the crash actually does begin.
What I’m trying to say here is that it just seems very dumb to be in the market when stocks are at just about their most extreme valuations in American history.
“Buy low, sell high” is the mantra of every stock market trader and investor out there.
But if you’re buying in to the market right now, you are buying high. And as a result, you will probably end up selling low.
It just doesn’t seem like a good idea to me. It feels like the risk-reward scenario is skewed heavily toward risk, and not a lot of reward.
One of Warren Buffett’s most famous quotes is, “I’d rather be a month early than a day late.” What he means by that is, he’d rather sell early and miss out on the last bit of upside left in the bull run than sell after the crash has already begun.
And that’s how I look at things right now. I don’t know if the bear market has already started, or if we rally from here and go make new highs, and the bull market continues a little while longer. But I know we’re close enough to the peak of the market that I simply see a lot of potential for loss, and not a ton of potential for further gain.
I think that given the obscene valuations, and given how long this bull market has been running, the smart move right now would be to sell.
But there’s still a few more factors that go into the decision than just valuations and duration of the bull market.
First and foremost, the Fed. The mantra of the past 13 years has been “Don’t fight the Fed.” When the Fed is both easing and keeping interest rates low, you stay in the market. You will make money.
But the Fed has said they’re going to end QE next month and then likely begin hiking interest rates to combat inflation. So with QE finished and interest rates on the way up, I think that’s a bad sign for the market.
As I went over in a long post yesterday, I think the Fed will hike interest rates into a recession if there is significant inflation (which there is) because the Fed’s primary mandate is to prevent inflation from wrecking the US dollar. They did so in the early 1980s, and they will do so again if they feel the US dollar is threatened by inflation.
The dollar is the lifeblood of the US empire. You have to think of things the way an American oligarch from the ruling class would: the dollar is the source of their power in the world. It is the world’s reserve currency. If the dollar is destroyed, our ruling class is destroyed.
And so the Federal Reserve will protect the stability and integrity of the US dollar at all costs, even if it means hiking into a recession.
When the currency is destroyed, the empire is destroyed. The Fed knows this. They know history. They know what a significant role inflation played in the decline and fall of the Roman Empire. Rome underwent many years of devastating inflation, and it was at its worst around the time of the emperor Diocletian.
The Yuan Dynasty in 13th century China experienced rampant inflation, and for a period of nearly 50 years.
The Fed knows inflation was largely responsible for the decline of the Weimar Republic in Germany, which in turn gave way to the rise of Hitler and the Nazis.
The Fed knows that inflation is the Empire Killer. An empire is only as stable as its currency.
So they will not let inflation get out of control. It’s the primary reason the Federal Reserve was created: to maintain the integrity of the dollar and prevent it from being destroyed by inflation.
I mean, yeah, of course the Fed also exists to make the rich richer, but that goal is secondary to the Fed’s mandate to maintain a stable dollar.
The Fed will get inflation under control one way or another. And that’s why things could painful economically for us. They absolutely will hike rates into a recession if inflation is running wild. They’ve done it before and they’ll do it again if they have to.
They’re saying this rate hiking cycle will feature a “soft landing” for the economy, but they also said inflation was going to be transitory. They are simply sugarcoating things because they can’t just admit outright the rate hikes are going to crush the economy, the housing market and the stock market. It’ll cause mass panic. This is why they always paint as rosy and optimistic a picture as possible.
And we’re already heading into an economic slowdown before the Fed even hikes rates. Atlanta Fed’s GDP Now forecast for Q1 2022 is just 0.1% quarterly GDP growth. GDP supposedly grew by 6.9% last quarter, but you have to wonder how much of that was inflation.
The sugar high from the trillions in debt-fueled fiscal stimulus alongside Fed easing is wearing off and the economy simply is not in great shape without it.
The final factor here is technical analysis, and when looking at both RSI and MACD on the monthly charts for the major indices, we can see that they are both indicating extreme overbought levels and have been for a while now. We can also see long term bearish RSI-price divergence in the major indices as well.
The market looks like it’s in the process of topping out. All major indices are now below their 200-day moving averages, and if they cannot get back above them, it’s an indicator that this thing is going down in a major way.
Indices certainly could reverse course and resume the bull trend, but in the past when markets have shown signs of topping out and rolling over, the Fed has always come to the rescue. Now the opposite is the case: QE will be ending and rate hikes are coming.
It really starts and ends with the Fed. If the Fed is supporting the market, you should be in the market. But when the Fed isn’t supporting the market, it’s probably a good idea to bail.
I am looking to sell into strength at the next opportunity, and will probably move my portfolio into mostly cash and inverse ETFs like SH (short S&P 500) and PSQ (short Nasdaq).
This isn’t investment advice obviously, and obviously I’d love to be proven wrong, but I just think it’s a bad time to be invested in stocks, personally.