What to do About the Stock Market Now
So will stocks continue up or is a big correction around the corner. It's a good question, and one whose answer eludes humble souls like me. But since we still have to manage our investments in stocks, let's take a stab at this.
First, we recognize that markets may be more discombobulated now that at any other time I can remember. The confusion mostly comes from the Fed's money printing (QE) and the effect it has on assets like stocks: it tends to blow them up like a bubble. The problem is there's no way to measure this. Are stocks going up strictly because of the Fed's actions, or has the rise reflected some positive stirrings in the economy? Remember that the stock market has traditionally been seen as a fairly reliable gauge of economic activity in the future - typically the next 6 - 18 months.
So let's forget the Fed and check the charts. There's nothing really bad there, except for the fact that the Advance-Decline line did not confirm the all-time highs in the Dow and S&P. The A-D did not surpass its recent high, as the Dow and S&P did, so we do have an important non-confirmation - something worth noting.
What do the experts say? Well, a couple of weeks ago, the chatter was that we were in a powerful bull market in stocks and that the Dow would head for at least 1750 if not 2000. The ever-effervescent Laszlo Byrini predicts at least 2000. On the other hand, Mark Hulbert has begun warning of signs that a top may be in and its time to sell.
Then there's CAPE - Robert Shiller's index of stock market valuation that smooth's out the average P/E ratio of the market by using a ten-year average. It's claim to fame is a recognition that only looking at one year's trailing P/E can be misleading, so the ten-year average helps to solve the problem of "outliers" in some way. It's actually a pretty good indicator to keep in your tool box, and I do look at it. It's now at 24, not only relatively high, but higher than all other world stock markets. That tells us that stocks are richly valued, or, to put it another way, over-priced. (Let's remember that stocks can stay over-priced a lot longer than logic admits. As Lord Keynes put it: "The market can remain irrational longer than you can remain solvent.")
Is there any conclusion is all this? Well, maybe common sense provides a guide here. Ask yourself some questions like: "Am I holding lots of stocks which, if they fell significantly, would cause me to lose sleep?" Or put another way: "If my current stock holdings fell 50%, would it negatively effect me in any substantive way?"
I'm sticking with my holdings for now, since I've asked and answered these questions and conclude that the impact of a steep drop would not keep me up at night and wouldn't change a thing about the way I live my life.
You'll have to do your own homework or soul-searching. Relying strictly on the sort of indicators and views outlined above won't do the trick - at least in this humble soul's opinion.
First, we recognize that markets may be more discombobulated now that at any other time I can remember. The confusion mostly comes from the Fed's money printing (QE) and the effect it has on assets like stocks: it tends to blow them up like a bubble. The problem is there's no way to measure this. Are stocks going up strictly because of the Fed's actions, or has the rise reflected some positive stirrings in the economy? Remember that the stock market has traditionally been seen as a fairly reliable gauge of economic activity in the future - typically the next 6 - 18 months.
So let's forget the Fed and check the charts. There's nothing really bad there, except for the fact that the Advance-Decline line did not confirm the all-time highs in the Dow and S&P. The A-D did not surpass its recent high, as the Dow and S&P did, so we do have an important non-confirmation - something worth noting.
What do the experts say? Well, a couple of weeks ago, the chatter was that we were in a powerful bull market in stocks and that the Dow would head for at least 1750 if not 2000. The ever-effervescent Laszlo Byrini predicts at least 2000. On the other hand, Mark Hulbert has begun warning of signs that a top may be in and its time to sell.
Then there's CAPE - Robert Shiller's index of stock market valuation that smooth's out the average P/E ratio of the market by using a ten-year average. It's claim to fame is a recognition that only looking at one year's trailing P/E can be misleading, so the ten-year average helps to solve the problem of "outliers" in some way. It's actually a pretty good indicator to keep in your tool box, and I do look at it. It's now at 24, not only relatively high, but higher than all other world stock markets. That tells us that stocks are richly valued, or, to put it another way, over-priced. (Let's remember that stocks can stay over-priced a lot longer than logic admits. As Lord Keynes put it: "The market can remain irrational longer than you can remain solvent.")
Is there any conclusion is all this? Well, maybe common sense provides a guide here. Ask yourself some questions like: "Am I holding lots of stocks which, if they fell significantly, would cause me to lose sleep?" Or put another way: "If my current stock holdings fell 50%, would it negatively effect me in any substantive way?"
I'm sticking with my holdings for now, since I've asked and answered these questions and conclude that the impact of a steep drop would not keep me up at night and wouldn't change a thing about the way I live my life.
You'll have to do your own homework or soul-searching. Relying strictly on the sort of indicators and views outlined above won't do the trick - at least in this humble soul's opinion.
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