Stocks have been driven to the brink of death by investors

What is the best analogy to use to depict the stock market, which has helped the S&P 500 rise 6% this year and 16% from its October lows?

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The best-selling book "Into Thin Air" by Jon Krakauer, which details the deaths of 12 mountaineers who were attempting to climb Mount Everest, has been cited by Morgan Stanley strategist Mike Wilson. The book explores the death zone, a region of the mountain that begins 3,000 feet below the top and is where oxygen pressure is insufficient to support life for a lengthy amount of time.

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"Investors have once again followed stock prices to dizzying heights, either by choice or out of need," claims Wilson. "Liquidity (bottled oxygen) permits them to climb into a zone where they know they shouldn't go and cannot live very long." "They ascent in search of the ultimate summit out of avarice, figuring they can descend without suffering terrible repercussions. Yet, ultimately the oxygen runs out, and those who disregard the risks suffer harm.

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According to Wilson, when equities began to increase in value in October, they had a price-to-earnings ratio of 15 and an equity risk premium of 270 basis points. The equity risk premium is the difference between the yield on safe Treasurys and the predicted earnings yield; a greater amount indicates that investors are receiving more compensation for their stock investments.

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Yet by December, with P-to-E ratios at 18, and the equity risk premium at 225 basis points, "the air started to thin." "We lost numerous climbers in the last few weeks of the year who pushed further ahead in the death zone," he said.

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But once 2023 got underway, "the surviving climbers decided to make another summit attempt, this time taking an even more dangerous route with the most speculative stocks leading the way," based on the fallacious assumption that the Fed would pause its rate hikes and then begin to cut rates later in the year.

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Investors started to speak more confidently about a gentle landing for the American economy and move more quickly and energetically. There is currently discussion of a "no landing" scenario due to their ascent to even greater elevations, whatever that entails. One begins to perceive and believe in things that don't exist because of such mental tricks the death zone employs, claims Wilson.

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The "no landing" hypothesis is most closely related to Torsten Slok, Apollo Global Management's chief economist. Slok claims that a no-landing scenario, in which the economy does not slow down, is bad for markets because it will necessitate more ferocious Fed rate-hike activity.

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With the P/E ratio at 18.6 and the equity risk premium at 155 basis points, according to Wilson, "we are in the thinnest air of the entire liquidity-driven secular bull market that began back in 2009," adding that the bear market rally from reasonable prices that started in October has evolved into a speculative frenzy based on an impending Fed pause/pivot.

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Granted, he acknowledges that since October, liquidity primarily provided by Chinese and Japanese central banks has increased global M2, a measure of the money supply, by $6 trillion, "giving the supplemental oxygen investors need to survive in the death zone" for a little while longer.

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In celebration of Washington's Birthday, the US stock market is closed on Monday. Last week, the Nasdaq Composite COMP, -0.58% increased for the sixth time in seven weeks as the Dow Jones Industrial Average DJIA, +0.39% and S&P 500 SPX, -0.28% declined.