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As we turned the calendar to 2024, it was 48% above its 50-year average and 21% above is average over the last 20 years, up from 35% and 11%, respectively a year ago. This trails only 1929, 1999-2000 and 2021 for the highest valuation in history.
The economy could get significantly worse, and investors should not panic when headlines turn from complacent to catastrophic. Economic cycles come and go.
Strong earnings could be a result of pent-up demand from COVID lockdowns and massive fiscal and monetary stimulus, high inflation with labor not catching up yet, and very low interest rates keeping interest expenses low. We see all these trends winding down, posing a threat to earnings growth.
After a rocky 2022, bonds are yielding a reasonable return again, at least if you ignore the effect of inflation on the real value of your investment. Stock valuations are at levels not sustained since way back in 2014, as measured by the popular price/earnings ratio (trailing twelve months of earnings). If you thought 2022 felt bad, it’s because it was bad.
A strong summer rally gave some hope that the bear market was over, and we could all get back to making copious amounts of money. The month of September put an end to that hope.