“The gods had condemned Sisyphus to ceaselessly roll a stone to the top of a mountain, whence the stone would fall back of its own weight. At the very end of his effort measured by skyless space and time without depth, the purpose is achieved. Then Sisyphus watches the stone rush down in a few moments toward that lower world whence he will have to push it up again toward the summit. If this myth is tragic, that is because its hero is conscious. Where would his torture be, indeed, if at every step the hope of succeeding upheld him? … Sisyphus, proletarian of the gods, powerless and rebellious, knows the extent of his wretched condition: it is what he thinks of during his descent.”
Albert Camus
After little more than a year of legitimate revaluation of equities following the 2007-2009 credit crisis, and more than three years of what will likely turn out to be wholly impermanent – if dazzling – Fed-induced speculation, investors have again pushed the stone to the top of the mountain. Despite the devastating losses of half the market’s value in 2000-2002 and 2007-2009, investors experience no fear – no suffering as a result of present market extremes. There is no suffering because at every step, as Camus might have observed, “the hope of succeeding” upholds them.
As we discussed several months ago, that hope of succeeding rests on what economist J.K. Galbraith called “the extreme brevity of the financial memory.” Part of that brevity rests on ignoring the forest for the trees, and failing to consider movements further up the mountain in the context of how far the stone typically falls once it gets loose. It bears repeating that the average, run-of-the-mill bear market decline wipes out more than half of the preceding bull market advance, making the April 2010 S&P 500 level in the 1200’s a fairly pedestrian expectation for the index over the completion of the current market cycle. A decline of that extent wouldn’t bring valuations close to historical norms, and certainly not to levels that would historically represent “undervaluation.” But consider that a baseline expectation, and don’t be particularly surprised if the market loses closer to 38% - which is the average cyclical bear market loss during a secular bear market period. A market loss of about 50% would put historically reliable valuation metrics at their historical norms, though short-term rates near zero would seem inconsistent with a move to historically normal valuations with typical (~10% annual) expected total returns, absent other disruptions.
The simple fact is that the completion of the present market cycle might be better, or it might be worse than historic norms. We know that we don’t want to speculate here in any event, but neither a severe market loss nor a move to “undervaluation” is a requirement for us to encourage market exposure. For our part, we would expect to shift to a significantly constructive position on a meaningful retreat in valuations – even if to still-overvalued levels – coupled with an early improvement in key measures of market internals.
The charts below display various journeys of Sisyphus - a chronicle of multi-year, increasingly speculative market advances that terminated in the same set of conditions that we presently observe. The charts show only the advance to the highs. So for example, the chart below of the advance to the 1929 high does not feature the 85% market plunge that followed, the chart for 1987 does not feature the subsequent crash, and the charts ending in 1972, 2000 and 2007 do not feature the 50% market plunges that followed. Then of course, there is the chart through last week which, we are assured, is entirely different from the others.
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