Nassim Taleb tells a little parable in his excellent book Black Swan. It’s a moral tale about the Thanksgiving turkey. For months leading up to Thanksgiving, it is singled out for good treatment. It is pampered and well-fed by its human caretakers, and it has no reason to think anything foul (pun) is afoot. In fact, the bitter irony is that, as the turkey’s rosy outlook on its prospects grows ever rosier, it is actually getting closer and closer to its inevitable demise. Taleb uses this parable to teach an important lesson about catastrophes: we are usually most confident they won’t happen right before they do. The market bulls might need to take heed.
In fact, the market bulls are more numerous and vociferous now than they’ve been in almost three decades. In spite of warnings concerning “valuation,” market bulls remain optimistic:
Nonsense, say the bulls, who share skepticism that the market has been inflated through aggressive Federal Reserve monetary easing, yet see no signs that stocks are ready to tank.
“A great many investors and analysts are wasting their time trying to prove that stocks have formed a new bubble—which they claim must soon pop,” David C. Jennett, who writes an eponymously named newsletter, said in remarks cited by Investors Intelligence in its report. “I think they are right about the bubble, but wrong about which market is in danger of a crash. It is much easier to make the case that the bond market is the real bubble these days.”
In other words, get ready for the axe to fall. September has traditionally been a bad month for stocks. Market bulls may point to the fact that September has been negative for the stock market only twice in the last ten years, but that doesn’t give me a great deal of confidence. That just means that when it is rotten, it will be very rotten. Because no one is really expecting it. Or preparing for it.