In the late stages of every long-term bull market there
has been a widely-believed, simple story for why prices will continue to rise
despite high valuations.
In the early-1970s the story was the “nifty fifty”. The
belief was that a group of 50 popular large-cap NYSE-traded stocks could be
bought at any price because the quality and the growth-rates of the
underlying companies virtually guaranteed that stock prices would maintain
their upward trends. The “nifty fifty” not only collapsed with the overall
market during 1973-1974, most members of the group under-performed the
overall market from 1973 to 1982.
In 1999-2000 the story was the “technology-driven
productivity miracle”. The belief was that due to accelerating technological
progress and the internet it was reasonable to value almost any company with
a web site at hundreds of millions of dollars and it was reasonable to pay at
least 50-times annual revenue for any company with a decent high-tech product.
Most of our readers will remember how that worked out.
In 2006-2007 there were three popular stories that
combined to explain why prices would continue to rise, one being “the great
moderation”, the second being the brilliance of the current batch of central
bankers (these monetary maestros would make sure that nothing bad happened),
and the third being the unstoppable rapid growth of the emerging markets.
Reality was then revealed by the events of 2008.
The story is always different, but it always has two
characteristics: It always seems plausible while prices are rising and it
always turns out to be completely bogus.
The most popular story used these days to explain why the
US equity bull market is bound to continue despite high valuations is often
called “TINA”, which stands for “There Is No Alternative”. The belief is that
with interest rates near zero and likely to remain there for a long time to
come it is reasonable to pay what would otherwise be considered an extremely
high price for almost any stock that offers a dividend yield. There is simply
no alternative!
We can be sure that the TINA story will turn out to be
bogus and that the high-priced dividend plays of today will go the way of the
“nifty fifty”. We just don’t know when.
This post is a brief excerpt from a recent commentary
posted at TSI.
