A correspondent writes,
“Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.”
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929
We hear a lot of investors and pundits referring to the “New Normal” which is a Twenty First Century code phrase for a “permanently high plateau” in which stock prices are elevated and will remain so indefinitely because of zero percent short term interest rates. When I read in the main stream press and the blogs that we are in the “New Normal” or a permanently high plateau I cannot escape the feeling that the pundits really mean that common stock prices will continue rising but just at a somewhat slower rate. A permanently high plateau with a mild upward slope, if you will.
Nobody seems to talk about what happens when we are on this permanently high plateau. Sounds to me like a trading range with no further upside progress. How would you like to be stuck in a permanently high plateau for the next five years? Dead money? What happens when there are no further upside gains to be made in the broad indexes on that permanently high plateau?
How many bullish investors are willing to remain parked in highly priced stocks after they have waited for a year or more with no gains? Being pushed out on the risk spectrum by zero interest rates might seem like fun, but then why would one expose himself to the risk of equities at prices elevated by PE multiple expansion when there has been no reward for several months? You might as well move to cash and eliminate the risk.
We have actual historical experience with a permanently high plateau from 1966 through 1982, in which the Dow touched 1000 five times during that period only to retreat from that high water mark each time. On an inflation adjusted basis at that permanently high nominal plateau, the Dow was cut in half [1,2].
Shifting to more modern times and the S&P 500, we see that the Wiley Coyote hang time at the more recent “permanently high plateaus” measures about nine months at the year 2000 high before we collapsed into the lows in 2003 and also about six months at the 2007 peak. In hindsight technicians would call these chart formations “double tops.”
Thus it would appear that investors in the Twenty First Century have shorter time horizons and are much more impatient than they were back when I began investing in 1969 and got my first good shellacking in 1974!!
The bottom line is that a “permanently high plateau” is a very unrewarding place to be.