Heck No, Stocks Aren't Too Expensive to Boom
Editor's note: The market's recent pullback has investors nervous... and skeptical of Steve Sjuggerud's "Melt Up" thesis.
That's OK. As Steve explained in yesterday's Masters Series essay, these dips are completely normal. In fact, the recent market volatility is giving investors an incredible buying opportunity...
In today's essay – excerpted from the most recent issue of True Wealth – he explains the other big objection folks have with the Melt Up...
Heck No, Stocks Aren't Too Expensive to Boom
The Melt Up skeptics also say stocks are too expensive. After all, they say, prices have gone up and up for almost 10 years. They believe stocks HAVE to crash from today's levels... that prices can't possibly move higher from here.
The funny thing is that folks have had this problem for years. They don't seem to understand the reality of the situation. Let me explain...
One of the biggest mistakes of my career was missing out on the last great Melt Up...
At the time, the dot-com boom didn't make any sense to me. Stocks soared on hype, but the businesses behind them had no real future.
I watched friends get "paper rich" in dot-com stock options. And instead of joining the mania, I stood on the sidelines.
"It can't go on any longer," I told myself.
But it did go on longer.
I learned an important lesson from that. And in my career, it's helped me to stand strong in bull markets around the world over the nearly two decades since the dot-com boom.
It's one big reason why I've stood strong in this bull market... and why we'll profit in the current Melt Up.
The lesson has two parts...
- Just because stocks are expensive, it doesn't mean they can't go much higher.
- High valuations are a symptom of a stock market peak... But they are not the cause of a stock market peak.
Let me walk you through my personal experience with this...
By the end of 1994, stocks had gone up for 12 out of the previous 13 years.
Said another way, you would have lost money on stocks during only one calendar year since 1981.
As you might guess, after that 13-year boom in stocks, measures of valuation showed that stocks were getting expensive. Any rational person in 1994 would think stock prices couldn't go much higher.
But then, something irrational happened in 1995. Stocks did go higher... They soared 38% in 1995.
That drove valuations to crazy heights...
Stocks had only been THAT expensive two times in history – in 1929 and in the late 1960s. You can see this by looking at the cyclically adjusted price-to-earnings (or CAPE) ratio, one of the most popular ways to measure value in the markets over the long term. Take a look...
Those two previous peaks were significant – and so were the losses that followed...
The Great Depression followed the 1929 peak. And stocks lost a fortune in the 1970s after the late 1960s peak... shedding nearly half their value from 1973 to 1974, adjusted for inflation.
So in 1994 and 1995, any rational person would have said that valuations were extreme – hitting levels that had preceded the two greatest stock market busts in the 20th century.
Buying then would have seemed foolish...
Except it wasn't. It was exactly what you should have done.
After soaring 38% in 1995, stocks jumped 23% in 1996.
Astonishingly, that STILL wasn't the end of it... The market soared another 33% in 1997.
By the end of that year, stocks had become more expensive than at any time in history. Take a look...
That was a sure "sell" signal – right? Stocks were even more expensive than right before the 1929 peak!
In hindsight, it was not a sell signal. Instead, what happened next shocked all rational people...
Stocks went up – again – in 1998. And once again, it was a BIG gain. The S&P 500 went up 29%. And tech stocks went up even more – the Nasdaq soared 40% in 1998.
This is when the last great Melt Up started.
Investors who had been skeptics got religious. The late 1990s had taught folks not to worry about high valuations. This time was different, right?
Animal spirits kicked in. The excitement was palpable. And things got even crazier...
In the late 1990s, many of my buddies were leaving their "real" jobs and joining dot-com companies. They got stock options for changing jobs. On paper, they were worth more than I could imagine.
And I started to feel like the fool – for staying on the sidelines, instead of joining them.
Stocks just kept going higher... The Nasdaq soared a ridiculous 86% in 1999.
Take a look at what happened to valuations before the boom was finally over. They went up further than any rational person would have thought possible...
If you were smart enough to know that valuations alone don't kill bull markets... and if you were bold enough to simply stay on board as the stock market "melted up"... then you would have made an absolute fortune.
To be honest with you, I was neither smart enough nor bold enough to do those things...
I personally missed out on most of the upside in the late 1990s. And I missed out on basically all of the upside of the dot-com boom in 1999.
I didn't believe in it. It didn't make rational sense. Stocks were record-expensive, and people were acting completely irrationally.
Now, I am older and wiser. (Certainly older... hopefully wiser!)
I have stayed on board today's bull market longer than any other analyst I know. My experience taught me two important lessons...
- Valuations are high today – but not absolutely crazy based on history.
- Valuations alone don't kill bull markets.
Most people say that stocks are near record-high valuations. The CAPE ratio is above 30 today, inching back toward the dot-com boom highs.
But after my 1990s experience, I look at how stocks soared from similar levels back then. And I believe we could see years of gains before we see true Melt Up valuations.
People are not acting completely irrationally – not yet. They're worried about valuations. They're worried about interest rates. They're worried about trade wars.
At some point, they'll notice that the sky isn't falling... And they'll stop worrying. They'll buy with reckless abandon. Valuations won't matter one bit. Their only worry will be missing out on the huge gains their friends and families are racking up in the market.
As we saw in 1999, that is the hallmark of a true market top. We're not there yet... Not even close.
That's why I still urge you to stay long U.S. stocks.
Today, we have high levels of fear and worry. Prices have pulled back... Volatility has picked up... And we are nowhere near the optimism and excitement that signals the top of the market.
As I said in April, investor sentiment gives you a major edge in the markets. It's how you can find situations with the potential for truly outsized gains. So when investors hate stocks this much – during a historic bull market – it's exactly what we want to see.
We want to own stocks right now. This could be the REAL last buying opportunity of the Melt Up.
Good investing,
Steve Sjuggerud
Editor's note: If you missed Steve's Melt Up Event last week, this is your last chance... Learn how to claim thousands of dollars' worth of Steve's research for a tiny fraction of the price – and watch the replay before this event comes offline for good – right here.