People en masse have started using the S&P 500 and other index funds as a long term store of value. Large amounts of money buy these stocks every pay period with zero regard to performance or current market conditions.
As far as I'm aware, this has never happened before. We don't know how this experiment will change the market long term or whether it will eventually collapse.
Currently the S&P 500 has a P/E of 40, a number it historically hits before crashes. Of course the pandemic makes that figure less meaningful long term than it already is, but even before the pandemic it was well above a justified level.
I have no better advice for people. I have theories on why it's overpriced, but I am also invested in broad indexes for lack of a better idea. But it may just be that the long-standing advice has become dated.
Or much more loss-making, depending how lucky you are.
No worries. We can fix that.
I first heard the argument you made used to explain why the market would continue to go up indefinitely in the late 90’s.
But that’s only because I was old enough to pay attention then. I don’t doubt in the least that it was used in the 80’s as well.
The 2008 crisis taught the US Federal Reserve how to respond to an economic crisis effectively, and they've been pretty successful at managing the current one. Note that Fed's main concerns are macroeconomic, so their assistance necessarily goes mostly to larger corporations and financial institutions, which seem to be doing OK (smaller businesses are suffering, but Congress stepped in for them... somewhat). I don't anticipate a liquidity shortage-triggered panic + recession like 2008.
However, all asset prices seem to be inflated. Real estate, crypto, stocks... all going up and up. They can't do so forever, it will be interesting to see how it fails this time.
You have to account for the amount of money in the system and how that money seeks to beat inflation.
You can't just pick up 40-year old chart analysis books and say "aha the P/E ratio for this sector is higher than normal", it is all part of an ecosystem.
The macroeconomic policy is going to be a greater influence than any chart-based psychology proxy or seeing how many essential workers are talking about investing their spare change.
Right now, more money is going to be created or distributed in the trillions. If the Central Banks are instructed to be involved, or chose to be involved, their method of getting new money into the market will be by purchasing more bonds which pushes interest rates even lower.
The only thing this didn't predict were new ephemeral asset classes, crypto. That people are opting to buy.
Yes. We haven't yet had a bubble collapse in a time of zero or negative real interest rates. When it happens, cutting interest rates will not be an option. That option has been used up.
Or a short term way to escape moneyprinting and inflation until the rates become sane.
There always is. And then, abruptly, there isn’t anymore.
Do you know which are the 4 most expensive words in English? "This time it's different."