Back in early 2000 at the height of the dot-com bubble, experts predicted a Dow Jones index to hit 50,000 by 2020. Today, in 2012, we stand below the inflation adjusted level of the Dow Jones back then. And yet now, with interest rates at virtually zero percent, the stock market has soared to lofty levels again. (Real returns after inflation on yields of fixed income instruments such as CDs are actually negative; factor in taxes, and one is really going backward in purchasing power)
Now we have the stock markets bouncing around near the highs once again and, by some measures, these levels are "normal" and in line with historic valuation models. But in the aftermath of both the dot-com bubble and the real estate bubble collapse in 2008, the stress level of money management is also hitting all time highs. The cries of "This time it's different" are drowning out Chicken Little's warning that the sky is about to fall.
Based upon the recent earnings and profits of corporations in America, things appear to be rosy indeed. But with the 100th anniversary of the Titanic just last month, need we be reminded that unforeseen disasters may occur in this market's uncharted waters? The icebergs amidst us are many. Europe is falling back into a recession (Spain announced 24% unemployment last week), commodities such as oil and gold are at stratospheric levels, job growth is nonexistent and wages are going falling. Add to this list the threats of Portugal, Italy and Greek debt defaults, and the picture becomes even darker.
But one of the largest financial icebergs is that the total market value of all stocks exceeds the current Gross Domestic Production (GDP) of the entire U.S. Historically, when stock prices rose to these levels, eclipsing GDP, a pullback, correction and, ultimately, crash occurred. Sir John Templeton always pointed out that "it is never different this time." And while Brazil and China are gaining status and spending wildly, it is still wise to take a breather and survey the landscape.
