It’s always with the benefit of hindsight we see the top, which means that while we can tell (knowing) stories of what it was like to be there, we can’t really be sure of what it was like to experience live. We will try to capture it, looking at contemporary anecdotes, new stories, receipts, diary entries, whatever comes to hand, but like all time it’s lost once it becomes the past.
If “we” see the top with the benefit of hindsight, though, there are also a few individuals who see it live. One wonders how many of them are professional naysayers, those peddling bad news and coming apocalypses to the ever-present demographic excited by the incipient End Times. And yet some are in between.
The temptation, of course, is to go to those who have done it before. Jeremy Grantham’s call in early January that we are at the top of a bubble was electrifying in that it cut through the years of half-hearted “things sure are crazy,” usually uttered while shrugging, and reminded us that trees do not grow to the sky.
Grantham’s place in the investing pantheon is assured by his calls in 2008/2009 as well as earlier performances, but he deserves credit for his writing style as well. He might not be a Howard Marks, but he is clear and direct, and almost every sentence is worth pausing to chew. He argues that this summer is about the longest the market can sustain itself, as by that point vaccination rollout will be closer to ending than starting (recent developments with the J&J vaccine extend that timeline somewhat to late summer) and corresponding stimulus will wane. With fiscal solutions dropping away and the Federal Reserve already having spent most of its arsenal on accommodative policy, the music stops playing, and that’s that. (As an aside, if three anecdotes make a pattern, I’ve detected a disturbing pattern around the reemergence of Prince’s “As long as the music is playing, you’ve got to get up and dance” quote, used increasingly to defend a sort of failing conservatively mindset.) Grantham recommends emerging market and value stocks.
I also think back to Jim O’Neill at GSAM, who was more of a commodity strategist than anything but from his privileged perch made somewhat humdrum advice have weight. I remember reading (or perhaps re-reading) for several years in a row his advice “Sell in May, go away, come back on St. Leger’s Day” followed by charts demonstrating that this was, indeed, sound advice on average. The St. Leger Stakes is September 11th this year.
The environment certainly seems frothy. Valuations are high. The rise of cryptocurrencies and digital assets of all sorts either disturbs a person or makes them feel like a Luddite. SPACs branded by celebrities and sponsored by the usual crew of charismatic know-nothings are making a bundle for the insiders by selling the promise of the Next Big Thing to investors. The eagerness for large private companies is increasingly absurd, if not irrational, as so few seem to offer any hope of long-term sustainability. Uber is still unprofitable to the tune of $5 billion a year. Beyond the big technology companies, whose reckoning approaches ever so slowly, it can be difficult to find digital darlings whose future can survive close scrutiny with regards to either their business model or their desirability (or both).
Looking at the fundamentals presents a mixed picture (which, Grantham would argue, is right – it’s not about going from good to bad, it’s about going from amazing to less-than-perfect). Margin debt is at an all-time high. The ISM New Orders index is at a 17-year high. Initial claims and unemployment rates are coming down. The savings rate is artificially high and dissaving will goose expenditures. Pent-up demand for travel and leisure is spoken about everywhere. Congress may be able to pass a few pieces of blockbuster legislation in the next year or so, but divided government is likely to set in soon thereafter (and more to the point, set in with a potentially higher corporate tax rate).
Longer-term, the same old bugbears circulate in my head. Impacts of climate change. Demographic timebombs in terms of funding entitlement programs like Social Security. Healthcare and the cost of education. Housing. The government is doing the right thing by supporting people, but it’s difficult to determine just how the bottom can fall out when that tapers off. Real personal income excluding transfer receipts (one of my favorite data series) has been negative on a year-over-year basis for 13 months if you exclude a blip in October 2020 – the only previous times that has occurred were the Global Financial Crisis and the stagflation recession of the early 1970s. The former led to the current era of extraordinarily supportive monetary policy, the latter to extraordinary inflation and Reaganism. Hooray.
So what will I actually do. Am I writing purely for therapy? I hope not – extraordinary times call for deep reflection on one’s course of action and justifications for it. In my gut, I agree with Grantham’s primary argument – that at some point, you could look back at having sold today and reinvested, and you will be better off on the round trip. The question this begs is when to come back into the market. I’ve come across many clients who sold at a local peak and were never able to get back in, because while they were happy to say “this is too pricey” they weren’t able to say “and this is when I will get back in”. I am not nearly old enough or wealthy enough to be able to shrug off being out of the market for years – I need to compound my returns, and invest more to compound, for several decades at least in order to get where I want to go. The discipline of investing is doing so regardless of what the current environment, knowing that over lengthy enough time periods you will come out ahead. As I sock away my savings every pay period, it has to go somewhere, even if that somewhere is – for the time being – nowhere. If one were to sell, say, half of everything in retirement and other tax-deferred funds, when would you get back in? S&P 500 P/E multiple below the 75th percentile? 50th? A dividend yield greater than that of the inflation rate? Greater than the TIPS spread? After 12 months, regardless of what has happened? This is the tension I cannot resolve.
St. Leger’s Day is probably as good a day as any. Monday is May 3rd. Let’s see about clearing some of the dead wood out of various accounts, leaving it in cash, and putting Jeremy’s words to the test.
smq.world 