Perhaps this is one of the most dangerous utterances in the history of investing—one that seems to routinely presage a major reversal in market direction. Analysts always want to find a reason to justify a particular market condition—either bearish or bullish—with the oft discredited caveat, “it’s different this time.”
In the late 1990’s, with stock market multiples at historic highs and many tech stocks trading at three or four digit multiples (and some with none at all because they had no earnings on which to base the calculation), many analysts began to hypothesize that things had fundamentally changed in the investment universe. Technological innovation and its massive boost to productivity would have an exponentially greater impact than the industrial revolution did a century prior in that business, commerce and all human interaction would enter a new era of virtually unbridled growth and progress. Because of our highly diverse, rational and sophisticated financial system, the missteps which caused, then exacerbated the Great Depression could not be repeated. We had entered a brave new world where gravity—at least as it pertained to stock valuations—had to be re-calibrated. If you recall—it seems so long ago—there were books being written about Dow 45,000?
Every time a seasoned veteran of many market cycles tried to dampen the irrational exuberance, the kill-joy would be met with a variation of the phrase “it’s different this time” and a practiced diatribe about why price-to-earnings multiples, other fundamental valuation measures and time-proven investment concepts had to be re-thought going forward. The old-timers would shake their collective heads, return to their charts and graphs and wait for this latest generation of “Masters of the Universe” to be proven wrong.
For many value managers, the late 1990s were awful years. The grossly undervalued stocks that they had invested in for their clients sat unglamorously earth-bound while the stocks of anything with a dot-com in its name took off like a bottle rocket. Many legendary investment gurus simply walked away from the game—unable to contend with this “new era” but equally as certain that it would not end well.
It didn’t. With the beginning of a new decade, we saw the tech stock bubble burst and—although we did not realize it at the time—we had entered a secular bear market that continues to this day. The telecom sector imploded. Some previously world-beating companies were exposed as frauds and the NASDAQ Composite plunged 75% from its peak—a peak it has not even come close to approaching since.
Today, we are enduring a significant recession. In some industries and countries, it is honestly a depression. The global financial system—yes, the same one that was thought so highly diverse, rational and sophisticated ten years ago—is in tatters. The stock market is mired in a secular bear market that for many non-tech stocks began over a decade ago. Based on price-to-peak or a ten-year average price-to-earnings multiple, the stock market looks as cheap as it has in a generation. We have a new government in Washington that wants to throw money at the problem and has cranked up the printing presses in order to do so. The housing and domestic automotive industries are in collapse. Commercial real estate may be the next to enter this vortex. Un-fit retailers are beginning to drop by the wayside as the shell-shocked consumer cuts discretional spending to the quick. Major banking institutions might have to be nationalized and many have already disappeared, either allowed to fail or into the arms of a government-prompted suitor. Unemployment is rising fast and home foreclosures are a chronic problem.
The average investor’s net worth is sharply less than what it was two years ago and the fear and anger in the system is palpable. In this environment, one can hear again the old saw, “it’s different this time”. Based on length, this recession is already entering what should be its eight inning. No, it’s different this time because the oversupply of housing, the frailness of the banking system, the socialistic policies being implemented by our government, the simultaneous global slow-down, etc.
This is not to belittle the significance of the problems that we all face. Without a doubt, the issues that we now confront are the most significant that have been faced in many years. A decade of easy money enabled an orgy of excess that will not be worked off easily. For most of us, life as we knew it three years ago will not return. However, life as we knew it ten years ago will. There will still be commerce. We will still buy cars, although with a greater focus on true affordability and fuel economy. While some of the auto manufacturers may not make it, plenty will. Houses, condos and apartments will be built again, only perhaps with greater thought being given to end demand.
The one constant in the investment business is that there are certain signals that invariably show up that presage a 180 degree change in market direction. Sentiment is a very significant one and a common phrase that plays out in the sentiment equation is “It’s different this time”. While we are undoubtedly going through a painful period of adjustment and nothing in the future is guaranteed, we cannot help but notice that we are hearing a lot of variations of “it’s different this time” being uttered right now. As with the myriad other times in history that this phrase has become common to the vernacular, the one constant to keep in mind is that it really is not different this time. Valuations matter. Recessions end. The long-term chart of earnings (and thus stock prices) is up and to the right. It is not a perfectly straight line and reversion to the mean is a common feature, but the movement is up and to the right.
So, buck up in this time of woe and fear! Another sentiment-based contrarian indicator is flashing more and more frequently these days. When someone runs off a litany or reasons why the recession will persist or prosperity will never return because “it’s different this time” it might be a good idea to begin thinking about being on the other side of his or her trade.