"The market has turned"These are the phrases heard when talking to investors these days, but rarely does anybody talk about the price being paid for stocks. As if the fact that the economy is getting better justifies paying any price for a stock. In 1999 investors said "the internet is the future" and they were right, but that did not justify paying any price for internet stocks. In 2007 they said "they aren't making any more land" and that was correct but that did not justify paying any price for real estate. Back in March, when the economy was "bad" no price was too low to sell at. The most common mistake investors make is to ignore price and invest based on a catchy phrase or story.
"The recession is over"
"Things are getting better"
Stocks are trading at extreme valuations given that we are at the beginning of an economic recovery and in a secular bear market. Further, it is up for debate if the economy is getting better. If injecting an injured athlete with drugs so that he can play another quarter is your idea of getting better, than the economy is getting better.
John Hussman addresses many of these issues in his weekly piece:
When we look at the current market environment today, it is clear that the enthusiasm about the market here is largely based on the idea that the recent recession is over, and that the economy will form a “V” shaped recovery similar, but much stronger quantitatively, to standard post-war recoveries. This is a very difficult argument to make, because the drivers of economic growth that existed in typical economic recoveries – particularly debt origination and consumption growth – are very compromised at present. Our perspective on the ongoing credit risk in the economy is much like that of economists Kenneth Rogoff and Carmen Reinhart, who foresaw the recent financial crisis, and are far less sanguine about the prospects for sustained recovery.
... Presently, my primary concern is that stocks are now overvalued, to about the same extent as they were in the late 1960's, and just prior to the 1987 crash, but certainly less overvalued than they were at the 2000 or 2007 peaks.