don’t know whether this is a “correction in a bull market” or the “start of a bear market,” but I am far more persuaded by the latter case. After ten years on Wall Street, however, I can promise you this: No one else knows either. Go ahead and listen to the parade of smart guests on Bubblevision–their reasoning ranges from impeccable to hilarious–but just don’t let yourself get seduced into betting big one way or the other. Because no one knows. (We have 50/50 odds, though, so half of us will be “right”).
One thing we do know: Based on correctly calculated long-term valuation trends (cyclically adjusted P/E), the stock market is still extremely expensive (close to the peak levels of 1929, 1966, and 1987, and only below the all-time peak of 2000). I expect that this will eventually revert to the mean, and that one of these days we will see the “start of a bear market” that could take us below the 7700 trough on the DOW in 2002. This could be it (and if it is, this is just what it will look like). And given the housing market, credit crunch, oil prices, etc., it’s not hard to see how we would get there. But anything is possible, and long-term valuation trends are nearly useless for near-term timing calls.