There’s a line in the old Grateful Dead song Truckin’ – “Lately it occurs to me what a long, strange trip it’s been” – that I think is an appropriate synopsis of the market environment in which U.S. investors find themselves today.
In many ways, the bull market of the last eight years has no precedent in recent market history. The confluence of (1) a secular shift to index funds and ETFs with the Labor Department’s fiduciary rule as an accelerant, (2) record low implied and realized volatility, (3) almost a decade of central-bank mandated ultra-low interest rates, (4) anemic economic growth and inflation, and (5) equity valuation multiples in line with past market peaks, has created a world in which the market doesn’t behave as it has in past cycles.
From our vantage point, it seems many professional investors are suffering from low-grade anxiety about the sustainability of the second-longest bull market in the last hundred-plus years, but no one seems to be changing their behavior accordingly. For fund managers, not being fully invested means not keeping up with the FANG-driven S&P 500, which every Wall Street professional knows could mean standing on the street with your office contents in a box. On the retail investor side, Jack and Jill Boomer have no incentive to act more cautiously either, because eight years after the recession ended the equity market is still the only place they can seemingly earn a decent return, especially if they depend on a retirement portfolio to meet living expenses.
Fellow Deadheads will recall another verse from Truckin’:
Arrows of neon and flashing marquees out on Main Street
Chicago, New York, Detroit and it’s all on the same street