I don’t want to be a Grinch, but at Christmas, you tell the truth: everyone is bullish, and I can’t help but feel a bit concerned.
The current bull market, which began two years ago, has seen the broader US market rally by more than 50 per cent, while the tech-heavy NASDAQ is up more than 80 per cent, last week breaking the psychological 20,000-point milestone for the first time.
A healthy correction on the ASX and international markets post-Christmas would be a good thing for investors.Credit: Mayu Kanamori
Add to this the seasonal tendency for a “Santa rally”, and it’s starting to feel like things might be getting a little too jolly. And you don’t have to look far to find that irrational exuberance, really is all around.
Bananas stuck to walls are selling for $US6.2 million ($9.6 million), Tesla’s stock has doubled in less than two months, making Elon Musk the first $US400 billion man, and following bitcoin’s historic run to over $US100,000, crypto mania is spreading like Mariah Carey in December.
As I write, joke cryptocurrency Fartcoin boasts a market capitalisation of over $US700 million – more than 85 per cent of US publicly traded companies.
Consumer confidence in the stock market has hit all-time highs, and household exposure to equities has never been greater. In November, global inflows into US ETFs (exchange-traded funds) exceeded $US149 billion, setting a record. All of this has resulted in one of the most expensive markets in history by multiple measures.
Corrections offer younger investors the chance to buy at more reasonable valuations, avoiding the trap of ‘chasing’ overinflated stock prices.
Of course, expensive stocks can always get more expensive. But there are several reasons why a pullback in early 2025 wouldn’t just be likely – it would be healthy. Markets don’t move upward indefinitely – corrections help reset valuations to more sustainable levels and blow some of the froth off the top.
Mild corrections within a bull market are a feature, not a bug. Since 1974, the S&P500 has averaged more than three 5 per cent pullbacks a year, meaning a pullback once every three to four months is normal.
