Time To Heed Homer
JANUARY 15, 2024
Not so long ago a knowledge of the classics was deemed essential for just about everybody, including investors. It can still be useful. Anyone wondering how to navigate today’s markets could find no better advice than in Book 12 of Homer’s Odyssey.
That is the story of how Odysseus put wax in his oarsmen’s ears and had himself tied to the mast to avoid the sweet but deadly music of the Sirens. In this way, Homer’s hero escaped becoming yet another corpse on their island.
Sometime in recent weeks, the US stock market careened from mania to hyper mania. The Siren song beckoning investors has never been more beguiling. Barron’s December 16 headline captured the consensus: “Embrace The Bubble.”
And what a bubble it is. By our calculations, US stocks are currently at valuations never before seen in history. The S&P 500 is higher priced than 1929 or 2000, the two prior peaks, and much higher than some other memorable moments such as 1972 and 2008.
US stocks represent well over 70% of world markets, another all-time high, much higher than the prior peak of 52% in 2000. The Magnificent Seven US stocks are themselves worth almost as much as the rest of the world in total and enjoy a combined trailing price earnings ratio of 62X. Nvidia alone is valued at more than the stock market of the UK, France, or Canada. The Nasdaq 100 sells for 48x trailing earnings.
Investors poured $1 trillion of new money into stocks over 2024. Corporations bought in another billion of their stocks. US household stock holdings reached 40%, exceeding 2021’s high.
All else being equal, rising prices must reduce future returns. During manias, most investors either ignore this math or insist that little about today is like the past. BlackRock trumpets that “Historical trends are being permanently broken in real time….”
Even so, there are some signs of foreboding.
For nine consecutive days through December 12, more S&P 500 stocks fell than rose, which had not happened for decades. For ten consecutive days through December 18th, the Dow Jones Industrial Index fell, which had not happened for half a century. Equal weighted indexes lagged far behind those weighted to the largest stocks.
Today, twenty-five stocks currently account for half of the market value of the S&P 500. Ten stocks account for 37%. These are the highest percentages since the start of the secular bull market in the early 1980’s.
In 1983, both market earnings and market multiples were at record lows, which produced an explosive return thereafter. Today, we have the exact opposite, record high earnings, forecast to increase at record levels (15.2% in 2025, far higher than 5.9% revenue growth), valued at record high multiples.
It was not of course all smooth going from 1983. During the mania that ended in 2000, Apple sold for a high of 2.7x sales, before crashing 80%. Now, after three years of only 2% average revenue growth, it recently hit a peak of 10x sales.
Manias bring danger for most investors but also opportunity for a few. The first principle is to protect yourself from different varieties of greed. The ill-fated investor who put all his chips on a market short in June 1929 only to go bankrupt right before the October Crash remains an object lesson.
During the mania, there may be opportunities missed by the torrent of speculators, momentum chasers, and full faith buy and holders. Afterward it may be possible to earn once in a lifetime returns by buying into severely depressed markets.
WRITTEN BY:
HUNTER LEWIS | CHIEF INVESTMENT OFFICER
Hunter Lewis is Chief Investment Officer of Hunter Lewis LLC, as well as a co-founder and former CEO of global investment firm Cambridge Associates. Learn more about Hunter Lewis.