The S&P 500 has hit a remarkable milestone, reaching its 50th record high this year.
US companies are dominating the stock market like never before. The 500 firms in the S&P 500 make up nearly half of the world's total market capitalization. (Chart via SRP) pic.twitter.com/XBYtZTdp6M
— Holger Zschaepitz (@Schuldensuehner) November 23, 2024
The market is up an impressive 24%, but this rapid growth has some experts questioning whether the good times will last or if a downturn is on the horizon. Henry Allen, a macro strategist, points out that the S&P 500’s CAPE ratio, which measures the market’s valuation, has only been higher twice in the last 100 years.
This suggests that the market may be overvalued. Allen compares the current market to three other times when valuations were high.
"I personally prefer a bull market that climbs a wall of worry. Once everybody is in the pool I get a little nervous." 🏊 – @awealthofcs https://t.co/CbYAQnR0HN
— The Compound (@TheCompoundNews) November 23, 2024
During the dotcom boom in the late 1990s, the S&P 500 tripled over five years but then fell into a long correction.
The market saw three straight years of declines, something not seen since World War II. Before the 2008 financial crisis, markets seemed stable with low volatility and tight credit spreads. But the crisis showed how a calm period can come before major financial instability.
As the stock market enters a generally favorable short-term seasonal period, there may be implications for short-term traders, investors sitting on cash, and those thinking about lightening up on their stock holdings, as @jaykaeppel detailed in a recent piece. pic.twitter.com/suVg6rubz0
— SentimenTrader (@sentimentrader) November 22, 2024
After the initial shock of the COVID-19 pandemic in 2020, markets bounced back strongly in 2021. This was driven by big monetary and fiscal stimulus.
The milestone and market caution
Valuations got stretched, leading to a big selloff in 2022 when the S&P 500 dropped 25% from its peak. Allen notes that in all three cases, there was little room for more gains because valuations were already high. Each episode was followed by a substantial correction.
A common factor was the “bubble mindset” where optimism about continuing good times led to complacency. Economist Hyman Minsky’s theory suggests that a long period of stability can lead to risk-taking and complacency, which may set the stage for future instability. Recent trends show Alberta having higher inflation than the rest of Canada, partly due to a strong housing market.
Core inflation in Alberta is 3.3%, well above the national average of 2%. As the S&P 500 navigates these historical parallels, investors are advised to stay alert. The bottom line, as shown by past market behaviors, is that big corrections often follow periods of sharp gains and high valuations.
Henry Allen’s analysis suggests that while breaking records is cause for celebration, it’s equally important to recognize the potential for quick turning points in the market. The combination of historical patterns and current economic indicators could signal the need for caution in the face of seemingly unstoppable growth.
