Stocktake: Stocks can stay expensive for a long, long time

Staying ‘irrationally bullish’ may not be as irrational as it sounds

Citigroup chief executive Charles Prince. Photograph: Issei Kato/Reuters

Citigroup chief executive Charles Prince. Photograph: Issei Kato/Reuters

 

The idea of staying “irrationally bullish”, as Bank of America puts it, might appal some investors, especially those who remember the infamous words of Citigroup chief executive Charles Prince in July 2007.

“As long as the music is playing, you’ve got to get up and dance,” he said.

“We’re still dancing”.

Months later, of course, global markets peaked and the global financial crisis began in earnest. Still, while no one wants to be bullish at the top, it’s remembering that markets can stay elevated for very long periods, paining those who cash out too early.

A recent Goldman Sachs note points out that stocks entered the ninth decile of valuation (that is, they were cheaper at least 80 per cent of the time) in 1992 and the 10th decile in 1995; they went on to post gains of 342 and 194 per cent, respectively.

Valuations

Nor were the 1990s a freak in this respect. Stocks again entered the ninth decile of valuations in late 2013 and have more than doubled since. They entered the 10th decile in December 2016; since then, they have gained more than 50 per cent.

The point is, markets aren’t easy. Staying “irrationally bullish” may not be as irrational as it sounds.

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