Stack on Stocks: Stay Bullish, but Alert

11/27/2017 10:25 am EST


James Stack

, InvesTech Research

From public confidence to bullish sentiment to the normally mundane employment data, the U.S. economy and stock market are reaching historic levels not seen in decades, notes James Stack, money manager and editor of InvesTech Research.

Last month, consumer confidence hit its highest level since December 2000. The percentage of bullish investment advisors recently touched lofty levels that were last reached in January 1987. And this month, the U.S. Department of Labor announced that job layoffs dropped to a 44-year low!

This might all sound like great news, and on the surface it obviously is. But what is forgotten in today’s exuberant celebrations –and the above statistics– is that both the economy and stock market historically peak when skies are blue and no storm clouds are in sight:

* December 2000 was just 3 months before the start of the 2001 recession.

* January 1987 was 9 months before Black Monday struck.

* And 44 years ago (1973), the stock market was about to suffer its worst annual loss in 35 years!


If the S&P 500 closes higher in November, it will have posted a positive total return for 13 consecutive months, surpassed only once in 90 years – 1959. The next year (1960) the economy entered a recession.

Valuation risk remains an overarching concern for today’s aging bull market. Although the leading economic evidence remains overwhelmingly positive, U.S. stocks are not cheap by historical standards. The current P/E ratio of the S&P 500 based on trailing earnings is 24.8, which is well above the 90-year average,

How expensive is the S&P 500 today? The P/E for this popular Index has exceeded 24.0 just over 10% of the time since 1928. If we exclude the extreme periods — the tech bubble of the late 1990s and the financial crisis of 2008-2009 — then the S&P 500 P/E ratio has been in the rarified range above 24.0 less than 3% of the time.

We’re not sharing these insights because we have turned bearish in our market outlook. We haven’t. Most technical evidence and virtually all macroeconomic data still point to new bull market highs immediately ahead.

However, it is becoming increasingly important to remember that trees do not grow to the sky, and bull markets do not last forever.

And don’t forget that virtually every bear market except one (1956) has repossessed or taken back roughly one-half or more of the previous bull market’s gain. Today, that would equate to 8,500 DJIA points!

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