Anatomy of a Stock Market Cycle

Believe it or not, stocks have been enjoying a bullish run for nearly four years. In fact, the Dow topped 14, 000 for the first time since 2007 and is near it’s all-time intraday high 14, 198 which happened during October 2007.

Of course, as I write this the markets are in retreat, and there is much hand-wringing about where the market is headed from here. With that in mind, I wanted to highlight an interesting graphic that I first ran across on The Big Picture.

Given your gut feelings, along with what you’ve been reading in the media coverage of the stock market, where do you think we are?

I’d say that we’re clearly on the upswing, having passed through despondency, depression, hope, and relief since the market bottom in 2009. But I don’t think people are excited, thrilled, or euphoric. So that would put us somewhere in the neighborhood optimism.

If I had to be more specific, I’d say that overall investor sentiment is currently “cautiously optimistic.” Of course, that’s just my wholly unscientific perception.

While the graphic above is equally unscientific, I do think that the overall message is worthwhile. As Warren Buffett has said:

“Be fearful when others are greedy and greedy when others are fearful.”

For the record, if you prefer to judge things by the numbers, the current P/E ratio of the S&P 500 is around 17 vs. a long-term average of roughly 15.5 — though the Shiller P/E 10 is a bit higher at 23 vs. an average of 16.5 or so.

4 Responses to “Anatomy of a Stock Market Cycle”

  1. Anonymous

    That chart is awesome! I’ve been following the cycle of the economy (as opposed to the stock market) but I think the sentiments charted are right on the money!

    I agree that we’re on an upswing now, buoyed in large part by the Fed’s QE policy. But, after every crash is a rebound, and after every rebound is a crash. The key is not to get too excited about either, but to keep the long view in mind.

  2. Anonymous

    If there is going to be cycle to a crash, I think it’ll be more like “Black Monday (1987)” or “Friday the 13th mini-crash (1989)” than “NASDAQ crash (2002)” or “Great Recession (2007-2009).” The former were more institutional verse retail where the latter hit retail hard. The above diagram is excellent description of the retail investor, but I’m going to guess that with two crashes so close together and with eldest of Boomer generation turning 67 this year, that we not see as much emotions dictating this cycle.

    I do think the market is artificially high, but I think it government and institutions propping it up (I’m also guessing not to simulate the economy, that’s the “sales point,” as companies seem flush with cash & doing stock buy backs, rather my guess is help underfunded pension obligations — based on “state and local” section of business media of about a year or so ago). If my hypothesis is correct this cycle may not have as sharp of edges as retail investor driven one.

    However in related news, I’m trying to figure out what to do with my asset allocations, as bonds have been making me more and more fearful with high prices and low yields. Retail investors seem to crowed into Treasuries (at least according to one article last summer), while I do not expect a crash, as much a long slow bleeding. Thus I’ve been pondering if I stick with a more traditional plan or alter it slightly to account for the governments/retail investor bond buying actions.

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