The price that has been paid for these blue skies is 28%. That is the amount that the S&P 500 has risen since the October lows, when the market was being priced for a repeat of 2008. In mid-September I shared the following quote from Howard Marks:
“… most people say, ‘We’re not going to try to catch a falling knife; it’s too dangerous.’ They usually add, ‘We’re going to wait until the dust settles and the uncertainty is resolved’.
The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left. When buying something has become comfortable again, its price will no longer be so low that it’s a great bargain. Thus, a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.”
- Howard Marks (h/t Distressed Debt Investing)
I will ask readers to think back to every crisis they have witnessed in the stock market whether it be the Asian crisis, the LTCM crisis, 9/11, Lehman brothers etc.. Eventually, all of these crises turned out to be buying opportunities. Now think back to every period like the current one where it seemed the market was bullet proof. How did they end up? Didn't it feel that way a year ago en route to a 20% collapse? This is the reason I am cautious when everything seems great and this is the reason I was buying when it seemed the world was ending a few months ago.
I am not predicting a re-run of last year. I acknowledge the possibility of a continued grind higher as valuations are not stretched. I just don't want to pay for blue skies and am willing to accept the consequences of possibly missing out on a great party. If market participants sober up I just might buy myself a few drinks.