All-Time Highs Should Feel Better Than This | Animal Spirits 443

Episode Overview

• The episode explores the market's "sliding narratives" in 2025, from AI-driven hype and subsequent skepticism to the encouraging sign of a broadening rally beyond mega-cap tech stocks.
• The hosts analyze the "free money era," arguing that the recent period of extraordinary returns from a small number of stocks was a once-in-a-lifetime anomaly that may have taught investors the wrong lessons.
• The discussion covers current trends in private markets, noting the slower return of capital to investors and the dramatic, inflation-driven increase in the number of accredited investors.
• The conversation also delves into personal finance topics, including the softness in the real estate market, the practical reasons for leasing versus buying a car, and strong opinions on movies.

Key Concepts

• Sliding Market Narratives: The year's dominant market stories have rapidly shifted from recession fears to an AI-driven boom, and now to a period of "angst" and skepticism about AI valuations.
• Broadening Market Rally: The market's strength is expanding beyond the "Magnificent 7." The equal-weighted S&P 500 is hitting new highs, with sectors like financials and industrials showing strong performance, indicating a healthy market rotation.
• The "Free Money Era" Anomaly: The recent low-interest-rate environment created an unusual number of high-performing stocks (from 40 to 120 compounding at over 20% annually), a phenomenon unlikely to be repeated.
• Investor Psychology & Learning: A concern that investors may extrapolate recent outlier returns as the new normal, though individuals tend to learn from experience over time, even if the market as a whole sees new participants making old mistakes.
• Private Market Dynamics: Buyout funds are experiencing a significant slowdown in monetization, meaning it is taking much longer for investors to get their capital back.
• Accredited Investor Thresholds: The number of households qualifying as accredited investors has ballooned (from 1.8% to 22%) because the income and net worth thresholds have not been indexed to inflation.
• Real Estate Market Softness: Anecdotal evidence, such as homes sitting on the market for over 200 days, points to a cooling in the housing market, creating stress for sellers.

Quotes

• At 0:57 - "2025 has been the year of sliding narratives, I think." - Michael Batnick, introducing the central theme of the discussion about the market's shifting focus.
• At 2:25 - "The narrative right now is, I would say, angst about the state of AI and the disbelief... there is an absolute wall of worry." - Michael Batnick, describing the current investor skepticism surrounding the sustainability of the AI rally.
• At 3:22 - "The narrative for the last couple of years... is that it's only been seven stocks propping up the market... and so now you see a lot of worry about the future of AI... and yet, the rest of the market has taken the baton." - Michael Batnick, explaining the positive shift from a narrow, mega-cap-led market to a broader rally.
• At 7:03 - "Wait, whoa, we don't want a bubble here... Oracle going 35% in one day, we don't want that. Bring it back. I think this is very healthy behavior." - Ben Carlson, arguing that the market's punishment of some tech stocks for missing expectations is a healthy sign that prevents a bubble from forming.
• At 8:28 - "[Microsoft's performance relative to the S&P 500] is barely up... It's barely outperformed the market... That is not bubble behavior." - Michael Batnick, using Microsoft's muted relative performance since the launch of ChatGPT as evidence against a widespread AI bubble.
• At 21:24 - "There's a high percentage of chance that this is a once in a lifetime thing that just happened." - Ben Carlson argues that the recent market environment, where so many people became wealthy from a small number of stocks, is a historical anomaly.
• At 22:53 - "In a normal decade, about 40 stocks compound wealth at 20% per year. In the free money era... 120 stocks had achieved it. There were imposters in his portfolio." - Ben Carlson reads a statistic from the Colossus article quantifying how the low-interest-rate environment created an unusual number of high-performing stocks.
• At 23:51 - "I trust investors to learn the right lessons over time, individually. Not as a group." - Michael Batnick offers his view on investor learning, suggesting that while individual investors may mature, the market as a whole will always have new participants making old mistakes.
• At 47:47 - "It's been on the market for 229 days." - Michael Batnick provides a real-world example of a house's long listing time to illustrate the softness in the real estate market.
• At 51:24 - "10 years in to a fund and you've only gotten 30% of your money back... Like, where's my money? Come on!" - Ben Carlson summarizes a key finding from a JP Morgan report, expressing the potential frustration of private equity investors who are experiencing much slower returns of capital.
• At 52:03 - "Since accredited investor thresholds aren't indexed to inflation, the share of qualifying households rose from 1.8% in 1983 to 22% in 2022 and is on track to hit 30% by 2030." - Michael Batnick reads a statistic highlighting how inflation has dramatically increased the pool of potential private market investors.
• At 66:12 - "Having little kids, you destroy your cars. And I am perfectly fine not owning for a while." - Ben Carlson explains his primary rationale for leasing cars instead of buying them.
• At 75:40 - "One Battle After Another, it sucked. It absolutely sucked. There was no point to it." - Ben Carlson gives a blunt, negative review of Once Upon a Time in Hollywood, criticizing its plot and purpose.

Takeaways

• Pay attention to market breadth, not just the headline-grabbing mega-cap stocks; a broadening rally is a sign of a healthier, more sustainable market.
• Temper future return expectations, as the "free money era" that created an unusually high number of hyper-growth stocks was an anomaly, not a new normal.
• View market corrections and the punishment of overvalued stocks as signs of a rational market, not necessarily a precursor to a crash.
• Focus on your own financial education and learning from experience, as this is more reliable than assuming the market as a whole will behave rationally.
• When investing in private equity, be prepared for longer lock-up periods and slower returns of capital than may have been the case historically.
• Recognize that the increase in "accredited investors" is a function of inflation on stagnant thresholds, not necessarily a rise in overall investor sophistication.
• Base personal finance decisions, such as leasing or buying a car, on your specific lifestyle and needs rather than on a universal "correct" answer.