How American stocks could continue to climb

IN THE “Society of the Spectacle”, published in the 1960s, Guy Debord, a leading theorist in a group of provocateurs known as the Situationists, depicts a culture in thrall to mass media where appearance is more important than fact and representation is preferred to reality. It is an unsettling book and not one that finance types would normally reach for. But after a strange year, the idea of the markets as spectacle has an appealing logic. A Debordian might say that their primary role is no longer capital allocation, or even enrichment, but entertainment. How else to make sense of stock prices driven haywire by social-media mobs or celebrities selling shares in shell companies?

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A reckoning feels due. And as 2021 draws to a close, markets seem nervy. Speculative assets, such as bitcoin, are down from their peaks. Even habitual bulls agree that 2022 will be difficult. On December 15th the Federal Reserve talked tough on inflation and signalled that it would end its asset purchases by mid-March and then start raising rates.

Yet there is an even more troubling possibility: that investors conquer their nerves and bid prices of stocks still higher. America’s stockmarket has proved surprisingly resilient. The economy has had a banner year, fuelled by a $1.9trn fiscal-stimulus package and an indulgent Fed. The S&P index of leading companies rose by 25% in the year to December 15th. It is around 40% higher than it was before the pandemic took hold in February 2020—and few thought then that stock prices were unduly low.

The bull market has kept going in spite of some big challenges. China’s tech backlash and property-market troubles seem only to have reinforced the desire to own American shares. And although inflation in America is at its highest for decades, that has not hurt the profits of big listed firms. Indeed, bumper earnings have helped lift share prices in 2021.

Take a longer view, though, and shares look terrifyingly expensive. A valuation measure popularised by Robert Shiller of Yale University puts the United States stockmarket on almost 40 times its earnings adjusted for the business cycle. Crypto-currencies have moved from the investment fringes to the mainstream. America has seen a rush of initial public offerings, often a signal that a bull market is coming to an end. So is the growing presence of retail investors. New smartphone apps and low-cost exchange-traded funds and brokerages that cater to small investors have opened up access to financial markets—including to derivatives, which small investors use in huge numbers to gamble on rising stocks.

Perhaps investors are sobering up. Already the blank-cheque-company craze has ebbed, with less-frothy prices and a slower pace of launches. Speculative shares have taken a beating, too: witness the 40% fall in the value of ARK’s flagship exchange-traded fund, which invests in fledgling technology companies.

And yet, despite all this, it is easy to imagine the bull market powering through 2022 with renewed vigour. One reason is that risk-free interest rates remain near all-time lows. The yield on a ten-year inflation-protected Treasury bond is around -1%, roughly where it started 2021. The negative real returns on bonds and cash help push investors into riskier assets, such as shares and private-market vehicles, including buy-out funds, direct lending and venture capital. Perhaps the Fed will raise interest rates dramatically in the coming years. But nothing like that is priced into bond markets.

A second prop for bulls is the buy-the-dip reflex that has become wired into markets. Experience has taught investors to see a fall in prices as a chance to buy more assets at a better price. In February-March 2020 the S&P 500 fell by a third in a matter of weeks; it then suddenly revived and kept going up. Swift action by the Fed helped keep finance flowing to companies at the pandemic’s onset. But in acting this way, it gave extra credence to the idea that it would always put a floor under asset prices.


Big tests lie ahead. It is easy to forget the sell-offs in 1998-99 as the dotcom bubble inflated. Likewise the coming months may witness market declines that seem to signal disaster, only for a revival to boost prices to even more worrying levels. The market’s performance has its own logic. “Real life is materially invaded by the contemplation of the spectacle and ends up absorbing it and aligning itself with it,” wrote Debord. Well, quite. However strange things look now, they could get stranger.

This article appeared in the Leaders section of the print edition under the headline “Situation normal: all bid up”

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