“When the last bears start to turn,” the market top is nigh, according to a market dictum. In which case, markets should now be “feeling rather twitchy,” says Miles Johnson in the Financial Times. Jeremy Grantham of GMO is a legendary value investor who called the dotcom bubble and the pre-crisis housing bubble. Having warned around two years ago that this long post-crisis market rally was heading for a correction, he has now decided that US large-caps may deserve to trade at higher multiples than in the past, because they are consolidating and have far more earning power.
Another high-profile sceptic has also conceded that high valuations could be justified. Big tech firms require little money to grow, Warren Buffett said at Berkshire Hathway’s annual meeting last month, so things have changed from “when Andrew Carnegie was building a steel mill and then taking those earnings to build another steel mill”.
The belief that “things are different this time” is a classic sign of a market peak. In the 2000s, many thought central banks had managed to tame the business cycle, while during the dotcom bubble people were bedazzled by the transformative potential of the internet. Nonetheless, although previously pessimistic investors are “joining the party”, as Fidelity’s Tom Stevenson puts it in The Daily Telegraph, the market doesn’t yet appear to have reached the “final euphoric phase” of a bull market.
For one thing, says Stevenson, “so deep are the scars from the financial crisis that much money remains on the sidelines, waiting to join in the fun”. And as Robin Wigglesworth notes in his Buy The Dip newsletter, “there’s still a lot of broad, generalised nervousness out there”. Bond guru Bill Gross, for one, claims that “instead of buying low and selling high, you’re buying high and crossing your fingers”.
Valuations are historically extremely high, though perhaps not quite in bubble territory. The Nasdaq’s nasty slide in recent days has triggered talk of a bubble bursting, but the US IT sector is only on a cyclically adjusted price-earnings ratio of around 35, compared with 175 in March 2000, says Capital Economics.
The economic backdrop doesn’t exactly scream “top of the cycle” yet either. Indeed, as Barclays analysts say, a “globally synchronised economic pick-up” finally appears to be starting after the world economy’s multi-year post-crisis hangover. Central banks are also keeping monetary policy extremely loose. “We are not at the top yet,” concludes Stevenson. But perhaps it can’t hurt to “start thinking about protecting what you have accumulated during the generous years since the financial crisis.”