The “market,” which I’ll define as the Nasdaq and the S&P, has been trading above its long-term trend line for over a decade. The First Bubble popped in 2000 primarily as a result of rising interest rates and plain exhaustion (and then earnings fell after the internuts started going bk and 9/11).
Now we’re in the Bounce Bubble, where margins and valuations are lower, but both are still well above trend lines. Fair value on the Nasdaq is probably around 1200-1400 and on the S&P is probably around 750-800, again adusting for normalized profit margins and valuations relative to inflation.
As Jeremy Grantham has pointed out, we never actually got below the trend lines when the First Bubble burst before the Bounce Bubble took hold. Which is the first major bubble of the post-war period not to do so. So, we’ve had unfinished business on the downside building up for some time now.
My guess is that rising interest rates are finally spooking people into realizing that there’s a slowdown coming in the not-too-distant future and that this will impact margins and earnings. Also, I think there’s just some plain old exhaustion going on. This insanity has been going on for so long that it was bound to end at some point, the only issue was exactly when. Maybe it’s in the process of finally unwinding… but maybe not. Again, it’s just a guess.
