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Each year in Seattle, our exquisite summer weather exits stage left in September, pursued by a bear worthy of Shakespeare: pervasive gloomy clouds and steady rain persist until next July. More rain accumulates in other cities, but we have more gray, cloudy days (usually 226/year).
Those many days of non-stop summer sunshine lead even the most careful to grow forgetful, leaving home without a rain shell, driving with joyous abandon on newly slick and dark roads.
So it can be too, in our financial markets, after so much sunshine.
We’ve lately lived through mostly sunny market prices. Except for April’s brief tariff tantrum, prices have risen, some rising even faster of late. Much ink has been spilled on the topic of market bubbles. Jonathan wrote this piece in 2021, before a big decline in both stock and bond prices during 2022 from a post-pandemic inflation spike.
It’s impossible to predict the future, including highs and lows of stock prices over any period. But as Warren Buffett noted in one famous speech at Sun Valley in 1999, valuing is not the same as predicting. By several measures, U.S. stocks are expensive as of market close on Sep. 30:
While these measures are high, some at new records, they can move higher still. Once market speculation takes over, and day traders are having their fun, the exuberance can last for months or years. Or it can drop like a rock tomorrow. Such volatility is the admission fee for long-term stock returns in a portfolio, and that is the best way to build long-term wealth.
At times like this, it’s important to know what game you’re playing. If you’re a long-term investor, as are most HD readers, beware of taking buy cues from prices pushed up by day traders who sell quickly. The expected future returns of any investment bought at an exorbitantly high price will be either very low or negative. And the math of losses is brutal. Dollar-cost averaging, through regular small buys over many years, usually helps dodge this bullet.
Jeremy Grantham, a long-time value investor and student of market history, uses objective price measures plus “touchy-feely signs of euphoria” to call a bubble. Grantham writes that while no two bubbles are alike, they often share certain characteristics. Price that’s risen more than two standard deviations (+2 SD) over long-term average is one objective measure. Acceleration in the final price “melt up” phase of a bubble is typical.
And we have some winners on that account:
Those three make growth of the next tier of bubblicious candidates seem slow:
The markets will always have pockets of exuberant buying, unmoored from measures of value. But when a broad market index starts outrunning its long-term average, you can almost smell the alcohol on Mr. Market’s breath. Vanguard’s S&P 500 ETF (VOO) is up over 80% since Sep. 2022, more than twice its long-term average monthly growth rate.
Even gold has gotten in on the act, now up over 130% since Oct. 2022, growth that has run far ahead of inflation. Gold prices like this remind me of Howard Marks’ quote “there are no bad assets, only bad prices.” Price matters.
Here are a few thoughts for these tricky investing times:
Here’s an interesting piece by Greg Ip, who writes the Capital Account column in the WSJ:
https://www.wsj.com/finance/investing/from-sports-to-ai-america-is-awash-in-speculative-fever-washington-is-egging-it-on-c1e5c814?st=M1dVqk&reflink=desktopwebshare_permalink
My thinking is that if you have a long term financial plan, regardless of current market measures, you just stick to your guns. We are still a while off retirement, so are almost 100% in a combination of global index funds and a commercial property. As we get closer to retirement we will move some of the index fund money into fixed interest or similar.
Changing allocations based upon market measures feels like it is getting awfully close to market timing (not looking for any arguments here, that is just how it feels to me). And I know that I’m not smart enough to do that. So we pick our plan and just stick to it. That also saves a lot of worry.
Agree that “stay the course” is always best, if you have a good plan.
Market timing involves frequently buying/selling all or most of an asset based on (futile) attempts to predict market direction. It’s different than taking action based on current market prices/valuation, within the context of your plan’s goals and key metrics.
Prudent steps that are not market timing:
Nice article. David. I certainly feel the tension building today, as I did in 2021. At that time, I did make some adjustments, in line with Jonathan’s final advice from the article you link in your piece: “A globally diversified stock portfolio, backed up by a safety net of short-term bonds, should serve me just fine.”
I don’t know where stocks are headed, so I’m focusing on keeping my “safe money” allocation aligned with the years of expenses I have that keeps me feeling safe.
I just performed my quarterly update of my portfolio and updated my net worth. My standard for rebalancing is for when an asset class is five or more percent, but with my domestic stocks being three percent over their allocation, the market being frothy, and the going ons in Washington I sold to allocation and bought bonds.
I have enough, and am not greedy. Just harvest the gains.
One further bit of advice: if you happen to have bought a highly speculative stock that has shot up like a rocket, be sure to ring the register. You don’t really have a profit until you sell.
“focus on percent change in total portfolio value.” Yes. A portfolio that has doubled in value can sustain a loss of 50% before those losses dip into initial value, which is the money one put in. In the most recent 5 years the S&P 500 has nearly doubled in value. Since July 2013 it has quadrupled in value. How much is enough????
“And the last significant sustained economic downturn, gosh, it’s 17 years ago. ” – Christine Benz at Morningstar, October 2, 2025.
Do you guys remember Jonathan’s post in the spring, asking us to predict where things would be this fall? I’m hoping that Bogdan will be able to follow up on that.
“Seems it never rains in Southern California.” My crystal ball gives the following economic weather prediction: stagflation
inflation = 3% annually
US GDP growth = zero
S&P 500 = nominal zero to 5% – 3% inflation = -3% to +2% real growth
International ex-US positive 5 to 7% annually – 3% inflation = 2 to 4% real growth (mostly from dollar devaluation)
US bonds = wild volatility like stocks (including TIPs)
Cash = guaranteed loss of purchasing power
AI dividends = earned by a few companies and individuals, loss for most workers, utility consumers.
If my crystal ball shatters, I’ll have sharked glass on my hand
Cash in a federal money market fund like Vanguard’s VMFXX is still yielding a bit more than inflation. Buffett once said: “Cash is an option on opportunities and options cost something.”
With a strong roof of bonds and cash to shelter us during the next downpour of falling equities, our all-weather portfolio will be fine. But if you’re that little piggy who skimped on the construction, you should be worried of the big bad bear.
Deciding how strong to make that roof can be a challenge. Market history guides us to a reasonable range for bonds+cash. But there’s always a wee chance tomorrow will be surprisingly different. This is perhaps the most important lesson to learn from history: life is often surprising.
That’s definitely the rub.
Wee? You sneaking a wee Irish word in lol
Grand mum was an O’Grady. Plus many work trips to Dublin. 130+ years and several generations after the famine, my great aunties still had their lovely, lilting brogues.
Ah, the Irish diaspora. Like dandelion seeds, we have spread far and wide, often thriving in the poorest soil.
Should have the theme to the movie “Jaws” playing while reading this. I’m with the author. To put it simply “stocks have become expensive” and that does not bode well. It is impossible to predict how the AI bubble will go. However, a significant market decline isn’t imminent although it will occur eventually. Considering the reaction by some when Trump was elected, I expect the lemmings, and the fun-loving people will head to the exits “en masse.” It should be quite a show.
Dave, I think your title says it all. We can’t trust the weathermen of the investment world to predict when the storm will hit, but we better be prepared.