January 25, 2025 - 5:00pm
Market timing may be a mug’s game, as the Wall Street adage has it. Still, we do seem to be drawing near to a moment of reckoning for US stocks.
Wall Street has been having its best first week of a presidency since Ronald Reagan. But by virtually every standard metric, the US market has reached price levels that typically precede a fall. On a price-to-sales ratio, it’s the most expensive market of the modern era. Ditto price-to-earnings, which has reached levels last seen before the 2000 dotcom crash. Compared to European companies with similar earnings, they’re attracting nearly double the price, and so are sucking capital from all over the world. Relative to government bonds, you’d have to go back a quarter century to find similar levels of valuation.
Given that buying stocks exposes you to all the risks associated with private capital, whereas government bonds are virtually risk-free, the logic of the market continuing to rise is hard to see. Why make investments which could keep you up at night when you could make even more money sleeping easy?
At their peak, bubbles work like pyramid or Ponzi schemes. Investors may fully expect them to crash, but if they believe they can foresee the crash and get out before everyone else, they keep buying, creating a self-fulfilling prophecy. And this can go on for a very long time. As the apocryphal quotation attributed to JM Keynes puts it, the market can stay irrational for longer than investors can remain solvent.
But there are now signs that the end is getting closer. Take that business of foreigners crowding into the US market. That’s often a contrarian indicator: being relatively low-information buyers who are likely to chase a trend, they act like fashion-junkies who buy into a craze just as the trend-setters are putting it on the shelf.
Equally, the “peak pessimism” about Europe at last week’s Davos Summit, compared to exuberance about America, is the sort of extreme emotion one finds just after the turn has begun. You wouldn’t guess it from the headlines, but over the last three months investors would have actually made a better return in the German market than the American one. The smart money may already be leaving.
Maybe the market won’t crash. It may just run out of steam and go sideways for a long time, with inflation gradually eroding the value of shares. With expectations of tax cuts and deregulation in the US, there will probably be some investment inflating the market a while longer. Nevertheless, what history has shown is that when valuations reach these levels, returns on shares over the subsequent decade are lousy. As that realisation dawns on retail investors, the money-flow will slow.
It’s possible this time is different, that we have entered a new era that has broken with all historical precedents, that AI will usher in an age of endlessly rapid economic growth. But in fact, the one thing that never changes is the refrain “this time is different”. One hears it at the top of every bubble. The crash is certainly nigh.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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Subscribe‘Maybe the market won’t crash … The crash is certainly nigh.’
There’s nothing like hedging your bets.
A weasel sitting on a hedge eating a waffle….
Goverment debt would seem to be a prudent short to medium term investment.
More poor economic content from unherd. Its a real weakness here. Unherd seems happy to buck the mefia consensus everywhere but when it comes to economics its one weak piece after another. On the above, anyone who thinks government bonds are a good idea and are “risk free” really shouldnt be listened to. The risk is from inflation. If inflation is higher then interest you are losing. Simple. And real inflation is always at least double official government figures. And Inflation is going to continue because debt is so high. Sure US bonds are wildly overvalued along with everything else but it is because of money printing. Nobody trusts money or government bonds to maintain purchasing power in these debt laden days.
He should be making a case for gold…and maybe bitcoin.
Some very good points in the article. However;
Yes, PE ratios are high, but so is inflation. Share prices have probably risen in tandem with the real cost of living, not the government manipulated inflation figures. Compared to real estate, collectable cars, art, quality food, and even collectable handbags have outperformed the stock market by multiples. Buffet has been sitting on a cash pile for more than a decade, so its not necessarily something that reflects the current market.
I don’t discount the possibility of a crash but perhaps comparatively share prices are not overvalued?
By any sensible metric, stock prices are grossly overvalued in the US. Arguably not in the UK. The argument in the article that investors are rushing to buy assets in the US seems bizarre to me – this is just the same old “momentum investing” argument from the late 1990s tech bubble trading under a new name. We all know how that ended.
The market concentration in the “Magnificent Seven” also ought to be a clear warning sign.
If Buffet had invested his cash pile he’d be better of now and could take a 20% correction and still be better off – not even he can time the market. As tempted as I am to move into cash I can’t help but think this time it is different because AI is IMHO already driving growth, hidden by sclerotic effects of an increasingly bloated public sector (not just here) and dying traditional business sectors not yet disrupted. I am an eternal optimist though!
Intriguing. I thought Trump said he’d inherited an economy in crisis. In fact given the inheritance he bequeathed Biden, and to be fair alot of that related to Pandemic, it’s a remarkable inheritance he’s been given.
But every chance now he’ll balls it up, especially in how he favours increasing debt to enrich his Billionaire cronies. Or increasing inflation with his tariff simpleton stance. The chump forgets it’s the customer who pays the tariff not the provider.
Trump will flip in due course to extolling what a great economy he’s made – ‘the best bestest’ or some such twaddle, but as under Biden many won’t feel it. Stock market prices don’t mean anything to them, (until they crash and then they pay). His core of ‘left behinds’ and ‘little guys’ will grasp they’ve been conned and photos of Trump with his fawning line up of Billionaires behind him will start to generate real anger.
Bessent seems competent pick and may actually be qualified for the job, unlike a number of other Trump picks. But another Billionaire of course, and his statements about further deregulation and tax cuts for the rich aren’t going to damp down the Stock Market and he’s not indicated how an increase in debt might be paid for.
The unravelling is coming.
If the stock market is grossly overvalued (I think it is) and there’s an economic correction downturn coming (a distinct possibility), these things are driven by fundamental forces and not the tinkering of politicians. What the politicians do might slightly alter the timing of inevitable corrections – but not the fact that these will eventually be needed. Trump and Biden’s contribution to all this is relatively minor. The major players are the central banks (way too much cheap money for way too long) and irresponsible financiers and investors.
The sooner we get the necessary corrections and stop printing ever more cheap money, the better.
Agree to a point PB. What impact do you think increasing US debt will have? Does seem like that’s only way Trump can fufill his promises, if the House lets him. And is his ‘grift’ in Cypto going to result in a crash there at some point?
Trump ‘inherited’ a stock market that has been artificially inflated for a long time, beginning with the near-zero interest rates that were the norm for years.
But every chance now he’ll balls it up, especially in how he favours increasing debt to enrich his Billionaire cronies. — Did you miss the debt accumulated under Biden the past four years or choose to ignore it?
Debt because the Billionaire tax cuts were locked in during Trump’s first term.
Debt post Covid a problem everywhere of course. The navigation is still difficult and complex. In fact though US seems to have come out of that shock better than most. Hence my question – will Trump balls it up?
Biden’s Treasury secretary has left us in a terrible mess when she doubled the amount of short term debt notes rather than locking in longer term, lower interest notes. This was a pure political move. I would not want the job of Treasury secretary today. Bessent does seem competent enough, but I don’t see how he gets us out of that mess.
People had been saying for two years the wheels were going to come off Yellen’s approach. Didn’t happen. And what economy done best after Covid?
Everything perfect? Of course not, but Bessent’s real problem is in the White House and not his inheritance.
Forget Keynes, forget Friedman—those relics of modernity!
In our post-modern, post-truth, post-reality era, stock valuations, like biological sex and fiat currencies, are just social constructs wrapped in power narratives and sprinkled with a touch of hyperreal pixie dust. As Jean Baudrillard might whisper from the void of simulation, “Reality? That’s so last century. It’s all hyperreal now: a model of a real without origin, like Wall Street’s endless bull market.”
Fueled by AI, the hyperreal economy will float higher than a WeWork IPO pitch deck—untethered, eternal, and utterly simulated. Buckle up, Y’all!
The U.S. capital markets continue to be the safest, largest and most liquid in the world. This has always been the thin red line that keeps the country from sliding into complete disaster mode as a result of so much faulty central bank and federal government intervention. Stock market corrections are inevitable, but the U.S. stock market is really the only sensible choice for long-term equities investors.
Great timing! 😀
I think the story of this crash is different though…
Cheers!
Anyone know how Bitcoin works? Now worth over $100,000
Blah blah blah. I’ve heard the same thing for 40 years now and have stayed invested all throughout. Of course markets get overpriced and corrections take place. People then swoop in and pick up bargains. If you are a trader, then yes, you need a lot of good luck timing the exit point. But then you also need even more good luck timing the re-entry point.
Long term history has proven beyond any doubt that stocks are a good choice for investors who look long term and have reasonable expectations. Just look up any chart of the performance of the S&P 500 over 100 years. Perhaps Mr. Rapley has shorted the U.S. market recently in his private account?
Indeed. And perhaps Mr Rapley realises the market can remain irrational longer than he can remain solvent.
The problem with that argument is that long term you are also old or dead. Depends what stage of life someone is in and time horizon. By most measures the markets are at record highs, and there are huge bubbles in the magnificent 7, AI , and other very speculative investments. Tesla is a perfect example, the market cap is 4 times that of Toyota, but sell only 2 million cars versus over 10 million for Toyota. There are huge overvaluations in many AI and tech stocks. It’s one of the most speculative markets in history, not to mention crypto, meme stocks and other wildly speculative investments. It won’t take much to trigger a crash, maybe the tariffs will start it or excessive spending cuts in the next year could trigger recession. Buffet is holding over 300 billion in cash, he knows the markets are in a speculative bubble. There is huge uncertainty about the Trump budgets and future deficits and inflation. Surprises are coming. Irrational exuberance and hype are dangerous , and there is a record amount of that right now, alot of people playing the markets right now have never experienced a crash. They don’t realize how things unravel quickly.
Well said. A share price has two elements, puchasing the intrinsic value, the discounted present value of the future dividend stream and end asset value, and hype, the hope that greed will encourage others to pay more simply because the price has gone up in the past. The author describes the problem with hype. Do you want your pension funded by the intrinsic value or the hype?
It is not impossible. Asset prices in Japan have not recovered from the crash in 89 to this day.
I think the last government mined and primed the US economy and I would expect it to be detonated shortly. I should imagine the U.K. economy will follow in its wake.
Build, back, better! Wasn’t that the mantra?