Bubble

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The problem here is that, as of Friday July 12, 2019 our estimate of likely 12-year total returns for a 

conventional portfolio mix invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills,

 has dropped to just 0.5%. 

A passive investment strategy is now closer to “all risk and no reward” than at any moment in history 

outside of the three weeks 

surrounding the 1929 market peak.

They’re Running Toward the Fire

Similarly, our “Exit Rule for Bubbles” is straightforward: 

You only get out if you panic before everyone else does. You have to decide whether to look like an idiot before the crash, or look like an idiot after it. 

Worse, investors often capitulate into panic selling only after their losses have become extreme. By then, it’s too late. It’s not the fire that gets them. It’s the heat. Once the warning signs are flashing, get out early. Attempting to squeeze the last bit out of a vulnerable, hypervalued market is what value investor Howard Marks describes as “getting cute.”

I continue to expect a market loss on the order of 60-65% over the completion of the current cycle. 

A 50% loss is a rather optimistic scenario, given that it would not even take valuations to the level we observed in October 2002, which was the highest level of valuation ever observed at the end of a market cycle. If our measures of internals were uniformly favorable, these full-cycle risks would remain, but we would defer our immediate concerns. It will remain important to monitor those internals, regardless of how extreme market valuations have become.

 DYI