As you will notice, we are currently at valuation levels where previous bull markets have ended rather than continued. I recently suggested that we are most likely repeating the secular bear market of the 70′s :
“Despite much hope that the current breakout of the markets is the beginning of a new secular “bull” market – the economic and fundamental variables suggest otherwise. Valuations and sentiment are at very elevated levels which is the opposite of what has been seen previously. Interest rates, inflation, wages and savings rates are all at historically low levels which are normally seenat the end of secular bull market periods.
Lastly, the consumer, the main driver of the economy, will not be able to become a significantly larger chunk of the economy than they are today as the fundamental capacity to releverage to similar extremes is no longer available.”
While stock prices can certainly be driven much higher through the Federal Reserve’s ongoing interventions, the inability for the economic variables to “replay the tape” of the 80′s and 90′s increases the potential of a rather nasty mean reversion at some point in the future. It is precisely that reversion that will likely create the “set up” necessary to start the next great secular bull market.