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Author: AdvocatusDiaboli Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8740  
Subject: Re: secured promidary notes Date: 4/15/2014 1:52 AM
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But, there is evidence (and I’ve said this before) that, short of something from left field, the market is unlikely to see a dramatic swoon. Perhaps the biggest reason that the market has risen so significantly is interest rates.


That is entirely true, but you're overestimating the effect of interest rates in the short term.
Case in point - 2008/2009. People were willing to buy treasuries with NEGATIVE yields rather than traditionally safe dividend stocks yielding 8+%.
Historically, the stock market has fallen about 30% during (or immediately prior to) a recession. The higher the valuation was going in, the bigger the decline tended to fall. Despite the fact that interest rates were falling at the same time.

The Great Recession ended about 5 years ago. There will be another recession in the US within the next 5 years. That is certain from the historical record.
There are a lot of possible issues investors can focus their fears on when the next worldwide recession comes, which it eventually will.

The bursting of the Chinese real estate/debt bubble, for example, which seems to be well underway already.
And what do you think is going to happen in Europe when the world goes into recession?

Valuations will not stay at this elevated level for the next 10 years. Given the abundance of capital and the persistent environment of low interest rates they may not go back to severe undervaluation (which would mean a decline of about 70%), but to assume that the inevitable next recession will not cause a substantial decline is highly unrealistic.

And it is unlikely that stock market returns between now and the next recession will be positive.
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