The Last Time This Happened, The Market Crashed

Tyler Durden's picture

Authored by Simon Black via SovereignMan.com,

A few days ago Charles Schwab, the investment brokerage firm, announced that the number of new brokerage accounts soared 44% during the first quarter of 2017.

More specifically, Schwab stated that individual investors are opening up stock trading accounts at the fastest pace the company has seen in 17 years.

17 years.

Anyone remember what happened 17 years ago?

Oh right. The Dot-com bubble burst.

After years of unbelievable gains in the 1990s, the NASDAQ Composite index peaked at 5,132.52 on March 10, 2000.

Simultaneously, during the first quarter of 2000, investors were rushing to open new brokerage accounts invest their savings in the stock market.

The NASDAQ Composite subsequently fell nearly 80% over the next 2 ½ years, wiping out trillions of dollars of wealth from retail investors.

The last phase of any bubble is almost invariably the euphoric shopping spree of an irrational public that buys stocks, real estate, etc. at record highs, foolishly believing that prices will keep rising indefinitely.

That’s what happened in 2000.

And that’s what seems to be happening today.

Investors are once again clamoring to buy expensive, popular stocks at price levels never before seen in the history of the stock market.

Company valuations are sky-high.

At 26.44, the S&P 500’s Price/Earnings ratio is the highest EVER, except for two occasions: the 2008 crash, and the 2000 crash.

At 28.93, the “Shiller P/E ratio”, which looks at company valuations over a longer-term, 10-year period and adjusts for inflation, is at the highest level EVER, except for two occasions: the 2000 crash, and the 1929 crash.

Price to sales ratios are near the highest levels in at least 50 years.

Price to book ratios haven’t been at this level since the 2008 crash.

And the stock market cap to GDP ratio is the highest since the 2000 crash.

(If you don’t understand those terms, I would highly encourage you to read this book. This small investment in your education might be the best you’ll ever make.)

Billionaire investor Paul Tudor Jones described these expensive stock market valuations as “terrifying” earlier this month at a closed-door asset management conference hosted by Goldman Sachs.

Yet for some reason individual retail investors still believe that stock prices will continue to rise.

According to Yale University’s Stock Market Confidence Index, for example, over 90% of individual investors believe that the stock market will rise in the next 12 months.

This sentiment isn’t actually based on any data; it’s simply how people -feel-.

These are classic bubble conditions: record-high prices, unsustainable valuations, baseless euphoria, and a surge in activity from retail investors.

In fairness, it’s possible that corporate profits surge by unimaginable rates; this would bring stock valuations back to reality.

But that’s unlikely.

Corporate profits are more or less tethered to the overall economy. If GDP growth is flat, corporate profits will be flat.

Real GDP growth in the US basically went flat in 2016 at just 1.6%.

And the Federal Reserve Bank of Atlanta estimates that the US economy grew at a pitiful 0.5% annualized rate in the first quarter of 2017.

Consumer spending, the mainstay of the US economy, slumped in the first three months of this year.

Plus, interest rates are starting to rise, which increases borrowing costs for both businesses and individuals.

Given such anemic conditions it seems a risky to bet everything on a sudden shock-and-awe surge in corporate profits.

So we’re right back where we started– an overvalued market exhibiting classic signs of a bubble.

I’m not suggesting that some major crash is imminent.

It’s entirely possible that this bubble can get even bigger; the stock market might rise another 10%, 20%, or more.

But it’s also possible we’ll see a drop of 40%+ from these levels. Remember, the NASDAQ Composite fell 78% from its peak in 2000.

Rational individuals always consider their downside first. Fear of loss should be far greater than the fear of missing out.

Quite simply if the reward isn’t worth the risk, don’t do it. Find something else. Or do nothing and simply wait on the sidelines.

The universe of options is a lot bigger than simply “US stocks”, and there’s an abundance of great opportunity outside of the mainstream.

Lately I’ve been involved in a number of secured lending deals where I’m able to earn between 10% to 12% per year with almost zero risk.

This strikes me as a great alternative to the stock market; I’d rather make a fixed 10% with minimal risk than potentially make 15% or 20%, but risk a 50% loss.

I’ve also been buying cash-producing royalties, which in my view is one of the most undervalued asset classes in the world. (More on that another time…)

Bottom line, there’s no sense in taking on enormous risks to make a few bucks.

The world is a big place. And with so much technology and connectivity at our disposal, there are plenty of safe, lucrative alternatives out there to consider.

Do you have a Plan B?

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SenselessPanic's picture

someone needs to bailout the QE

Truther's picture

Old Yeller: Ready with CTRL+P, Sir....

Looney's picture

 

Where’s Dennis Gartman?

I hear that he borrowed $24 from his elderly mother and now he’s got enough dough to resume day-trading.  ;-)

Looney

abyssinian's picture

I saw him collecting beer cans earlier Saturdady morning and he was kind enough to stop and gave the homeless guy at the corner some stock tips.  I heard him telling the homeless guy to "buy on every dip..... 

MANvsMACHINE's picture

The homeless guys are his most loyal followers. Coincidentally, they all used to have lots of money.

Decay is Constant's picture

Headlines like this multiple times a week. So BURST already and get this party started!

baby_tone's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

red1chief's picture

Dennis is jumping up and down in your return key, which gets hit before you type.

Looney's picture

 

If my Braille keyboard upsets you, feel free to skip my posts.

Have a nice week-end.

Looney

MANvsMACHINE's picture

Red1chief only uses voice recognition but he doesn't realize that it's programmed for Chinese.

Mr 9x19's picture

they will kick the can at any cost, we are no longer in 1929 era between wars and 2008 has been 5 trillions usd nuked.

you still think the nuclear icbm is the most powerful weapon ?

 

the mother of all bomb is a money printing press.

Raffie's picture

They will use a BAIL IN this time.

Our money to fix their issues, how cute.

AGuy's picture

FYI: Schwab has been plastering ads about the're ultra-low trade commissions (I think $4/trade) and free/low cost investment advice (with refunds on fees if the investments don't work out).

I suspect that a lot of current traders are switching to Schwab from other brokages, so its probably not that sheeple are pouring back into day trading.

Truther's picture

Plan B, C, D, E....... F*ck this shit. I'll believe it when I see it unravel.

spiral galaxy's picture

This is yet another of the 100 some odd articles on ZH per year re gloom & doom, 'the last time this happened....', markets crash, bonds crash, metals crash, inversion subversion diversion graphics never ever seen before, sell now, the Fed said, holy shit we're going to die, etc, etc, articles. Yet, here we are years later, nothing has happened, and still reading & believing this drivel. Sad

SeattleBruce's picture

Ah, and I suppose you think massive, unprecedented debt held by counterparties is sustainable.  Sad.

spiral galaxy's picture

No I don't. But the incessant gloom & doom ....ugh!

stocker84's picture

If you have a room full of murderers, and you say, someone is going to get killed, then you're not a brilliant psychic medium... You're just deducing the obvious.

If you neglect to mention that they are all in individual jail cells, then you're just pushing your own wishful thinking agenda.

 

First rule of investing that is as old as time and it trumps everything except a black swan is "never fight the Fed."

 

Zero hedge is the psychic (deducing the obvious) 

 Not mentioning? that nothing will pop without bouncing because the Fed will accommodate is neglectful and wishful.

In other words, zero hedge is wishing and hoping and mixing that up with reality.

In investing, emotion and personal beliefs or delusions are deadly.

Unfortunately ZH has been delusional, at least on this matter, forever.

Furthermore, they have been steering the sheep in the wrong direction. And that's just plain wrong.. Not to mention futile.

They talk about buying the dip after the fact. BFD!!

Until the Fed stops accommodation, until there is a black swan (don't bet the house on it because? they are rare) this market will go upwards or sideways.

Down is a buying op.

Until it's not? Until the Fed stops manipulating the stock market.

The Fed is wishing for a black swan because that's their only coup de gras!(that and the even less chance of the economy just fixing itself... Hahahahaha don't hold your breath)

Is everything overvalued? Should the s&p be at about 1400 or less? Yes and yes.

The Fed can print us into Oblivion... But what will you do with all those worthless dollars?

In other words... Trade accordingly and hope you can keep up with inflation and dilution of your dollars.

As much as i dislike gold, there's your only sure thing in the end. (Dislike gold in a sound economy)

And this post, folks, is the best advice you will find on the internet....

Speaking of which, Abraham Lincoln once said, don't believe everything you read on the Internets...

I think that guy got shot, though... Not sure.

 

 

 

 

CHX13's picture

Since nothing makes really sense anymore I am hiding in PMs, waiting for the storm to hit hard, not playing their game. Things are so bad and wrong out there, there is no other place to go IMHO. GLTA.

Normalcy Bias's picture

These new account holders will be the same as the crowd who piled into SNAP and then acted with surprise and bitterness when they discovered that the "market" can, in fact, decline rapidly.

Fake Trump's picture

North Korea short the markets through proxies. 

red1chief's picture

The article makes a good point, but what really matters is the Fed.

Houses Depreciate's picture

Well.... The fed has done a good job at collapsing housing demand. It's a 20 year lows and falling.

Zenling's picture

These people are a special kind of stupid.

CHX13's picture

As long as you have the MEGA-hedgefunds like the SNB buying shares of APPLE and the likes (to keep their own currency from exploding) we simply cannot know what "valuations" are in the cards. Everything paper and credit it their realm and they have already proven to go full retard to save their systems and the top elite cronies. Dow 50k - it may well happen, even when the real economy is in shambles. Why? Because we have negative (real, and in some places nomincal) interest rates where you can't really "save" currency anymore, so everybody is forced to chase some trend leading to a bubble-driven ecnomy, where the denominator (the currency, or rather fiat currency in general) are the fuel and ultimate bubble at the same time. 

SeattleBruce's picture

Which doesn't make the reality of the bubble, nor its end any different.

CHX13's picture

Fully agree, it's a bubble of epic propotion already. Just when, why and how the bust will come is the question...

alfredhorg's picture

I'm scared for my money, so I'll go long janitorial services:

https://howibeatgold.wordpress.com/2017/03/27/janitor-amassed-an-8m-fort...

Janitorial services will boom when SHTF.

Librarian's picture

Said janitor's income accrued not from his janitorial services but from his passive investment income.

Perhaps you can sell one of your kidneys?

doomchild's picture

Let's be clear about one thing though. This keeps happening because the FuCkiNg FED wants it to be this way. This is how they want to dominate, by blowing bubbles and having them blow up so that they can print money out of thin AIR to buy up all the real assets.

sunny's picture

I'd love to have a buck for every time I've seen the title of an article "The last time this happened the market crashed!" not just here on ZH but on any number of economic sites.  

Dr. Magoo's picture

And my dick is too big

There's a big bang theory

MANvsMACHINE's picture

Please remove the magnifiers and look again. You'll be unpleasantly surprised.

rls9642's picture

Geez, enough already. ZH has harping on a market crash for 5 years now. Meanwhile the greatest bull market in history just keeps rolling. It's all about ZIRP. When rates rise it will end, in the mean time sell the rallies and BTFDs.

Grandad Grumps's picture

Tell me some more fake news baby ... ooooohhhh you do it so good, baby.

Been hearing gloom and impending doom for many years here at ZH. The analysis used to mean something and now there is no correlation netween analysis, price and B/S stories.

Ooooooohhhh, hit me again, baby!

Houses Depreciate's picture

Cheer up my good friend and remember.....

 

Nothing accelerates the economy, creates jobs and raises the standard of living like falling prices to dramatically lower and more affordable levels. Nothing.

Seasmoke's picture

I became a day trader March 1, 2000. And that's why i am still Here at ZeroHedge. 

ctiger2's picture

Retail investors are finally coming off the sidelines. The DOW is set to double from here.

DuneCreature's picture

OT! - Well, off topic if you don't use the general topic of just more 'Bad News'.

Two investigators for Gowdy go missing in Arkansas.

http://yournewswire.com/trey-gowdy-investigators-missing/

True and suppressed, fake and gaining no news cycle traction or true and no body gives a shit about these two except Trey, Killary and Bimbo Bill? .......... Who knows?

What dimwit Dick Tracys go to the state of Arkencide in anything but and armed convoy with heavy air cover?

Live Hard, One Off Of The Wire For Those Might Be Interested, Die Free

~ DC v5.0

Hillarys Server's picture

"Or do nothing and simply wait on the sidelines."

I've been patiently waiting on the sidelines for ten years.

Hurry up and crash already.

Sanity Bear's picture

The last time an article showed up on ZH with the title "The Last Time This Happened, The Market Crashed", nothing happened.

Same with the dozen previous times.

Indiana1's picture

yes good one.... .but I do agree the market is an overvalued joke
And another relevancy is that bubbles always seem to last just long enough to convince most people they are permanent

ronaldwilsonreagan's picture

This is just a reusable headline you see here at Zero Hedge once every couple days.  Eventually after a while they will get it right and claim they are geniuses.

Manipuflation's picture

How much gold is too much gold?  I have been at this metals game for almost 20 years.  Gold is hard to come by.  You can't have too much gold can you?  The ultimate result of investing is to convert to gold.  Once it is gold it becomes "dead money".  Or so the experts say. 

I like dead money.  It's freedom.  I don't want my gold doing anything at all.  I am only the custodian of some gold for now.  Long after I am gone the gold will still be gold and I will be ashes.  The gold will be my children's.  I am going to need MOAR.  Tha is my deal.

You see, it is not wealth or something super special that I think I need.  I like simple.  Do I really need 25 firearms and ten's of thousand of rounds of ammo?  Do I need Harley Davidsons?  I am not sure that I need all of that and I sure as hell don't want to buy a house even though everyone says it is a great "investment".  NO IT ISN'T!

What are you going to do with a McMansion that is already falling apart?  It is the American Nightmare.  You ZHer know that and that is why you assholes are my only friends.  I won't go to personal friend's social events.  I barely talk to any family of mine.  I can't change my no debt idea.

The answer is that you can never have too much gold.  I have more fancy shit than I need.  Who cares?  I have the nice woman as a wife already for 15 years and the kids are healthy.  I will not complain.  Gee whiz, I wonder if that was by accident?  No, you damned right I worked my ass off for it.  

I am just a little different.  I am not buying mutual funds or any index vangaurd crap.  I didn't say I was the best man ever born.  I have a little Holden Caulfield in me.  Lot's of Phonies.    

JoeTurner's picture

I agree on Gold. I look at holding it as a way to boycott the insanity of the stock markets. There was a time when markets were honest, orderly and somewhat efficent at discounting and price discovery. Thanks to the FED there are no functioning markets left anywhere in the world. Gold and silver are a good way to 'keep powder dry' while we wait for reality to reasset itself.

A. Boaty's picture

The last time ZH posted an article like this, the market didn't crash.

Cassandra.Hermes's picture

The two most powerful warriors are patience and time, i'm in cash and waiting!!!!

Fed-up with being Sick and Tired's picture

These new Clients of Schwab may just be switching due to a Commish WAR!   Schwab announced $4.95 commissions a while back.   Could be E-Trade or TD clients moving over.