What's The Bear Case For Stocks?
5 risks to this bull market
In the midst of a bull market everything seems to go up. Nobody believes anything will go down.
The S&P 500 is up over 23% YTD. There have been 51 new all-time highs for the S&P 500 so far in 2024. That’s good for the 7th most all-time highs in a calendar year in history. There are still about six weeks left in the year.
We continue to see and hear the words, is this as good as it gets? It’s feels like we’ve heard that now for over half the year. But it keeps getting better and things have not shown any signs of letting up. There is broadening earnings growth and profit margin expansion. Now a new administration is coming in with the intention of lowering taxes along with deregulation.
There has been no shortage of reasons to be bullish and few worries for investors. Hence why the market has ripped and keeps on ripping higher. There has been a lot of green and everyone loves that.
That leads me to the question, what’s the bear case for stocks?
Is there a bear case? Yes, we all want to be long but we need to be aware of risks and time horizons.
That makes me look at things when most aren’t. What risks are out there? I took a look at some data points and indicators that are showing possible risks that could slow or possibly derail this bull market.
The Buffett Indicator
The Warren Buffett indicator, which is a long-term valuation that measures the ratio of market capitalization to GDP. It’s the total value of the Wilshire 5000 divided by GDP. Buffett once stated the ratio as, “the best single measure of where valuations stand at any given moment.”
The indicator just hit an all-time high of 202%. That even surpasses the levels of the dotcom bubble, the GFC, and 2022 bear market.
S&P 500 CAPE Ratio Is Elevated
The S&P 500’s CAPE Ratio, also known as the Shiller P/E Ratio is a measure that uses real earnings per share over a 10 year period to smooth out fluctuations in corporate profits. It’s calculated by dividing a company’s stock price by the average of the company’s earnings for the last 10 years, adjusted for inflation.
The ratio has crossed above 38 for just the 3rd time in history. The only two other times it was higher, the dotcom bubble and the GFC.
High Stock Market Valuations
Most overall market valuations are overvalued right now. Stocks reconsidered expensive. You could look at a number of metrics and you can see that S&P 500 valuations are on the high end of the range. Some are approaching the highest in history.
Here is a chart that shows where P/E, P/B, P/S, P/CF and dividend yields are at today and relative to history.
The 25-year average on the S&P 500 historical forward P/E ratio is at 16x. It’s now at just over 22x. That the highest level since April 2021. It’s also above the 5-year average of 19.6 and above the 10-year average 18.1.
Everybody Is Bullish
We all know what happens when everyone is all to one side of the boat. It becomes overcrowded. That’s exactly where things are at. Everyone is bullish.
Here is a good stat and chart from Callie Cox on the percentage of Americans who think stock prices will move higher.
51.4% of investors expect the stock market to move higher in the next 12 months, the highest % on record going back to 1987 (Conference Board's Oct survey)
Also, only the third time in history than more than half of respondents said the market would increase
The retail investors bull-bear spread 12 month average just reached the highest level in 20 years. Investors are the most bullish they’ve been in the last 20 years.
American households are also holding a record share of their assets in equities. As history shows, these peaks are usually followed by a period of lower returns.
Cost Of The US National Debt
How can we talk about market risks without mentioning the US national debt. It’s only one of the most talked about bearish arguments from the bears for the past few years.
We’re constantly pounded over the head on the US national debt issue. It hasn’t affected the stock market and I don’t think that it will have any impact. But I’m still including it because it’s constantly talked about more than probably any other bearish risk to this bull market.
Some points are valid and yes there is a spending problem. The new administration has created the DOGE, which will be led by Elon and Vivek to help cut and fix spending. It sounds like they’re going to get serious about the issue.
There are many ways to go with the US national debt issue. I’m solely focused on the costs to service that debt and have some data on it below.
We know the debt rise is out of hand and it looks to only be getting worse under the current trajectory.
Under the current policies, the debt outstanding will grow from 100% of GDP to 200%. You can see why the new administration is getting serious about this issue.
The worries really come in to me in the cost to service that debt. The annualized payments have now crossed $1.1 trillion and the rise of that number has just skyrocketed.
The interest payments on that debt is now taking up 13% of the 2024 federal budget. That percentage is clearly going to rise. You can tell why putting this issue near the forefront of the new administrations plans once it assumes control is so important.
Something always ends a bull market. They can’t and don’t go on forever. And that’s healthy. One of the reasons could be mentioned above. Or it could be a surprise that nobody saw coming. It could happen this week, next month, or years from now. That’s the beauty of it. Nobody knows when.
The Coffee Table ☕
Tony Isola wrote a good short piece called, Time Isn’t An Asset Class. This is so important for retirees and pre-retirees to read. He is spot on with this line, “If you ask me, leaving a ton of money to people when you are dead is a major buzzkill.”
Great post this week by Nick Maggiulli titled, The Things You Can’t Buy. Nick got engaged (Congratulations Nick!) and he wrote about the good reminders that come across in life. Like there are things that money just can’t buy or replicate. “But do you know what will impact your life in 20 years? How you spend your time, how your treat your body, and who you spend your time with.”
I love football and especially the Buffalo Bills. This is such an interesting visual that shows how much each NFL team last sold for. There are quite the rates of return here.
Source: Tyler Webb
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