In the very first posting for 2018, we covered the prescient comments of Warren Buffett from November 22, 1999 when he said:
“Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more (Loomis, Carol. Mr. Buffett on the Stock Market. Fortune. November 22, 1999. accessed: everyday since.).”
In the 17 years since Buffett’s comments, the stock market has gained +2.27% when adjusted for inflation and compounding of dividends. Even if we included the year 2017 in the picture, the CAGR of the S&P 500 would have been +3.15%. It is easy to say that Warren Buffett is a genius because, after all, look at the wealth that he has managed to amass. But what about the regular people out there? How can they identify a market that has peaked?
One source that we like to cite is the work of the late Richard Russell of Dow Theory Letters (www.dowtheoryletters.com). In his March 22, 2000 letter, Russell Provided what is known as the “Top Out Parade.” That Top Out Parade provided much of the indications that the stock market had peaked. To put the Top Out Parade in perspective, we’ve posted a chart of the Dow Jones Jones Industrial Average indicated in blue the Buffett quote and in red the Russell posting of the Top Out Parade.
Both Buffett’s commentary of the expected performance of the market over the next 17 years and Russell’s observation of the Top Out Parade identified keys area in the market that should have been obvious to everyone.
Below is the original Top Out Parade list as published by Richard Russell on March 22, 2000 in Letter 1298. We think that anyone who tracks similar data will have a decent idea of whether or not we’ve seen some kind of top in the market, provided the indicators do not make new highs. Enjoy.