The long bull market is over, and it ended in the classic style. Little by little, sound value judgments about what stocks should go up start to vanish as investors, be they large or small, simple or sophisticated, hedge fund managers or the guys who trim their hedges, start to put their money in whatever is working at the time. Why? Because this strategy usually keeps working for a while. Sometimes it keeps working for years after it should, by all reasonable measures, have fallen apart.
During bull markets, there are always investors who buy stock that they know is overpriced, simply because the trend supports (or seems to support) the idea that it will soon be even more overpriced. This is known as the greater fool theory. The problem is that those who make money selling to greater fools almost invariably end as fools themselves. It’s like a game of musical chairs in which all the chairs vanish at the same time, but the music keeps on playing.
We aren’t headed for a crash, or a correction. We are headed for a bear market, because that’s what you get when an economy — even if it’s a good economy — cannot support the earnings expectations made on Wall Street.
There’s no reason to panic at this time, nor is there any particularly compelling reason to own stocks at this time, many of which are priced exactly where they should be in twelve to eighteen months, provided that everything goes their way. For the record, I’m not asking anyone to trust me on this. There’s always some conjecture involved when making these calls, and you may not conject as I do. Just consider the following issues, then draw your own conclusions.