Pen People Mar 2018

Peninsula outlook 2018:
Stocks and
real estate
Peninsula Realtors Darin DeRenzis, Les Fishman and Heidi Mackenbach with financial analyst Joe Gagnon. Photo by Brad Jacobson (CivicCouch.com)
by Stuart Chaussee
Peninsula finance and real estate experts weigh in
on the bull market and housing appreciation
Until about a year and a half ago this was one of the most hated stock
bull markets in history – few wanted to believe. We had fears of deflation,
recession, Brexit and plenty of political uncertainty. The fear
of losing money, still fresh in the minds of many investors pummeled during
the 2008-2009 crash, kept enthusiasm relatively low. But, over the past year
or so we have witnessed a change in investor behavior that is reminiscent
of late-stage bubble action – we saw a melt-up in prices. More recently,
however, markets have come under pressure as investors come to grips with
a fairly substantial uptick in interest rates and the prospect of an accelerating
economy.
The sharp rise in the market since late 2016 has pushed stocks to the second
highest valuation in history. With the CAPE Ratio (cyclically-adjusted
price-to-earnings) now sitting at 32, even when factoring in the February
declines, the only more expensive market in history was the 2000 Dot-Com
Bubble, when valuations hit about 30 percent higher than where they currently
stand. So, there shouldn’t be much debate about whether or not
stocks are back in bubble territory. But, when will the party end? Well, if
we get through this current volatility and stocks find a floor, and if the bubble
once again starts to exhibit euphoric investor behavior, then we may
well see another 20 percent to 30 percent increase over the next couple of
years. It sounds ridiculous and quite optimistic I know, but this would be
fairly typical price action of a bubble. If this plays out as history would suggest,
it would take the Dow Jones up over 30,000 in what could be one last
flurry of price acceleration as speculators embrace greed and throw money
blindly at the market. Jeremy Grantham (the well-respected institutional
money manager at GMO) recently wrote about investor behavior when
markets are in bubble territory and others, including Robert Shiller (Yale
economist) and Bill Miller (well-known fund manager) have echoed similar
thoughts about the current market exhibiting signs of speculative behavior.
It is important to note that the euphoria that had been missing during this
long bull market finally started to show in 2017. And, it’s worth noting that
any temporary weakness we may get, may indeed be fleeting. We are in a
March 2018 • Peninsula 17