Predicting where the stock market is headed may be a Sisyphean task.
Trying to foretell when the stock market is reaching its peak may be a fool’s errand. Even the most respected and famed investors and market pundits can’t claim to know when it’s time to get out—or for that matter into—the market, no matter how savvy they may be on investing.
That is because no matter the fundamentals and trends, stocks SPX, +0.41% can never quite free themselves from human emotions, according to Ben Carlson, director of institutional asset management at Ritholtz Wealth Management.
“There’s no formula for forecasting market tops because you’re really trying to predict human behavior, which can’t be done,” Carlson said on his blog.
That may be significant advise to heed as investors continue to fret about the lofty levels of the equity markets in the wake of the president Donald Trump’s election, which by one measure is at their richest levels since 2004. Promises for market-friendly economic stimulus and a relatively dovish Federal Reserve has helped to push stocks to record heights.
“What jumps out is that there’s no discernible pattern among previous peaks. The stock market has experienced bear markets with high valuations and low valuations, high bond yields and low bond yields, high dividend yields and low dividend yields, high inflation and low inflation.”
Carlson explains that some of Wall Street and academia’s sharpest minds were caught off guard by the U.S. financial crisis a decade ago. And understandably so since, for many, there were no familiar markers to herald the ensuing market mayhem, as he demonstrates in the following table.
“What jumps out is that there’s no discernible pattern among previous peaks. The stock market has experienced bear markets with high valuations and low valuations, high bond yields and low bond yields, high dividend yields and low dividend yields, high inflation and low inflation,” he writes.
What ultimately unhinges the market is when investors lose confidence and that is typically triggered by a recession. Out of the 15 bear markets he lists, he points out that 11 were linked to a recession.
“So, there’s a good chance the next market peak will be caused by a downturn in the U.S. economy. Unfortunately, predicting a recession is just about as difficult as picking a market peak,” he said.