The longer a bull market lasts, the more bullish people get. And now that the market is seven months and 60% away from the March low, people are getting really bullish.
Specifically, people are starting to draw comparisons to 1983, the second-year of an amazing 18-year bull market that took the Dow up 10-fold.
Could they possibly be right?
Yes, anything's possible. And with the market already up 60%, we're off to a good start.
But there are three big differences between now and 1983:
- First, stocks are already getting expensive. This year's earnings were depressed by huge write-offs, so a P/E ratio based only on this year doesn't tell you much. But even when you "smooth" the P/E by averaging 10 years worth of earnings, the market looks expensive. It's about 15%-20% above its long-term average.
- Second, consumers are still dragging around a mountain of debt. In the early 1980s, consumer debt was only 62% of GDP. Now it's 122%. In future years, consumers are likely to reduce their debts, not add to them, and this will likely crimp buying power.
- Third, in 1983, interest rates were at near record highs and on their way down. Now, they have only one way to go: up. All else being equal, a steady rise in interest rates will likely produce lower P/Es.
On the positive side, governments around the world are screaming from the rooftops that they're going to keep giving money away for free until the hereafter. As long as they're doing that, the value of some assets will likely continue to increase. And right now, one of those assets is stocks.
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