S&P 500 Historical View: Bubble or Not

Here is a chart of the S&P 500 that I use to calibrate myself to current market conditions.  I have similar charts for the DOW and NASDAQ Composite.  I use a log chart and then draw a price channel to get a view of where stock prices typically run historically, and what performance to expect when certain "trend" levels are hit, especially the top and bottom trend lines of the channel.

There are a lot of arguments about whether current conditions can be defined as a bubble.  What should be clear is that in the very long view the current price level is very high.  But one might say compared to past performance this century the price isn't that high compared to the last two peaks.  But if you look at the long term history showing many quite serious corrections when price is above the 4th trend line and up against the long term trend resistance line at the top, it shouldn't give one a lot of confidence the market has a lot of room to run.

Another way to think about it is through the lens of a long term billionaire investor, or a fund manager of billions.  That kind of money needs to be calculating the expected return on investment over a five, ten or even longer time period.  One of the methods would use the expectation of a regression to mean which would be the middle trend line, along with historical performance at various price "trend" price levels.  So do you think billionaires are approaching current market conditions with extreme confidence when in long term historical terms price is near the 100th percentile when the obvious bubbles are left out.  This is also why many analysts are predicting very low stock returns for the next 5-10 years because the probability of a return to mean is very high.  The current price level is at the mean expectation for 2022, 7 years away.

Some might argue my trend channel is too conservative.  I plotted a separate channel that enclosed the 2007 peak below the top channel line.  It actually puts current conditions around the 75th percentile rather than near the 100th percentile.  But I discount this case because of the very extreme correction of 2008.  This tells me that the price levels from 2004-2007 remained extreme by historical measures and 2007 was a very extreme peak, but not as bad as 1929/1930 or 2000/2001.  I see a return to historical norms/means in stock prices, albeit a very slow one.

Generally it seems we are at a point that few recognize when the markets are expensive.  I believe we are still suffering from a hangover from the dotcom bubble, where there is a continual comparison to the dotcom bubble which was a true 1929 type of event, while the more appropriate comparison for current conditions is 2007/2008, the 1987 flash crash or conditions in the 1960's and 1970's.