No. of Recommendations: 6
As Jim and others have aptly commented that market valuations currently seem very high, the natural question is: are such valuations justified, and can the levels of valuation be supported by future growth that would seem to be currently priced in and required?
By my (overly simplistic?) way of thinking, a significant amount of market growth was driven by the following over the past number of years:
1. Population growth (this doesn't seem to get much press, but is sure feels like a big one to me).
2. Productivity gains (and these have been numerous).
3. Considerable debt accumulation (spend now to grow, at the (possible) expense of future growth).
So if we evaluate each of the items above that have led to economic growth and market appreciation:
1. Population growth sure isn't what it used to be. The numbers speak for themselves, particularly across developed countries. Counting on population growth to support market gains over the next (say 10) years would seem like a huge stretch.
2. Debt accumulation. Can we take on even more debt to help drive near-term growth? Perhaps, but again, this feels like a stretch to me as well. If governments were spending on things that would really drive economic growth, maybe. But call me a skeptic I guess. This also feels like a stretch to me.
3. Productivity gains. This is a wild card. On one hand, the gains we've seen in the last 50 years have been (IMO) remarkable. I won't even try to list them. With the AI craze, lots of people (some of which are pretty darn bright) are projecting massive productivity gains in our relatively near future. I'm in the "maybe" camp on this one. On one hand some of a capabilities are quite remarkable. On the other hand, I'm not so sure we've seen layoffs quite like what you'd expect if those gains were as massive as hoped. Perhaps this is coming??? I worked in the AI field years ago before it was popular, so have a bit of experience with this.
As someone who recently retired, this stuff nags at me a bit. I'm curious to see if others are also feeling mildly nervous about this, or if I'm just part of "the old guys are always worried" crowd. For me, I plan on dusting off and re-testing things that may help with more conservative asset allocation. I'm loathe to call it market timing, but... asset allocation and market timing kind of go hand in hand.
If I'm missing something, I'm all ears. If you're feeling some of these things, then I know I'm not the only one with some jitters.
Thanks, Lee
