Some valid, if seven years overdue, observations from Stifel's Barry Bannister on where the bubble is today, the biggest bubble of all time we might add.
Where is the bubble today? Perhaps central banks are the bubble. In 1929-1949 the bandage came off quickly (i.e., deflation was absorbed) and the three Dow Industrials down-waves (left chart) were (89)% 1929-1932, (49)% 1937-1938 and (24)% 1946-1949, averaging (54)% and clearly front-loaded during 1930s deflation. Since 2000 (right chart), the S&P 500 waves were: (49)% 2000-2002 and (57)% 2007-2009 as central banks tried to mitigate deflation, the implication being a 3rd ~(53)% decline may lurk in the 2015-2020 period (perhaps triggered by losing the deflation battle) to match the 1929-49 three-period average of (54)%. We watch the 100 week moving average (red line) for clues.
And, as a cautious Stifel, further notes about the propsect of future gains, "Curb your enthusiasm for the S&P 500 from 2015-24E"
The Fed front-loaded the bull market since 2009 via QE/0% rates, lowering both the discount rate (for DCF models) and corporate cost-of-capital (creating faux economic profits, ROIC(1) minus WACC(2)). Thus, we only see a 5.5%/year total return CAGR (2% dividends + 3.5% price) point-to-point from 2015 to 2024E. That is still ~2,900 (3.5%^10 price-only) for the S&P 500 at the end of 2024E. But given the way 2000-2020E parallels with 1929-1949, significant equity downside risk before 2020 is possible if the battle against deflation is lost, since the “bubble” today may be the invincibility of central banks in the face of severe deflationary headwinds.
And remember: the biggest parallel between the 1929-1949 period and the present one, is what is about to take place on December 16, which as we showed previously [4], is precisely what happened when the Fed - again making a policy error in tightening in 1936 - unleashed the second round of the great depression and sent the Dow Jones some 50% lower the next year, and only the second World War managed to push the US out of its historic slump.
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