How to Think About the Stock Market Now
Despite last week's decline, the stock market continues to hit
all-time highs in the major indices (e.g., Dow, S&P, NASDAQ,
etc.). Breadth, as illustrated by the Advance-Decline line, stock only,
has confirmed the bullish trend. But until recently much fear has
accompanied this ride. Why?
Well, first of all, any bull market worth it's salt climbs "a wall of worry." At least that's the time-honored nostrum for bull markets. And, indeed, it's a worthy consideration. But we've also got rather high valuations too, if traditional metrics like the Shiller PE Ratio mean anything. Then there's the lack of participation by retail investors. That's often been a sign that a bull market still has legs. The reason is that the retail investor has traditionally held back their dollars during long, strong bull markets, until the final phase of said market. It's one of the reasons the average person does so poorly investing in stocks: they wait until the final days of a bull market, rush in when it's peaking, then take a bath when it collapses.
This last factor - participation by the retail investor (vs. the institutional investor) - helps explain the three phases of a bull market, with the last phase being the most manic, and therefor the most powerful. When the retail investor piles in, prices jump as if on steroids. So we should take note now that stories of renewed interest in stocks by the average investor have begun to appear. Stock funds and ETFs have benefited handsomely as a result.
So if all the above makes sense, and you've been either out of or light on stocks because: fundamentals have been rich; the economy has been weak; the bull market is long in the tooth; or any other reason, is it now time to jump in and ride the bull's final phase?
Ah, grasshopper, alas we don't have any words of wisdom for you here. After all, momentum has a life of its own, and it's got nothing to do with what's rational, never mind anything at all to do with wisdom. What we can say is that if you believe that the final phase of a long bull market has begun and you're prepared to take the plunge with the understanding that you'll need some plan to get out of the way when things turn - as they inevitably will - then you've found a golden moment.
Well, first of all, any bull market worth it's salt climbs "a wall of worry." At least that's the time-honored nostrum for bull markets. And, indeed, it's a worthy consideration. But we've also got rather high valuations too, if traditional metrics like the Shiller PE Ratio mean anything. Then there's the lack of participation by retail investors. That's often been a sign that a bull market still has legs. The reason is that the retail investor has traditionally held back their dollars during long, strong bull markets, until the final phase of said market. It's one of the reasons the average person does so poorly investing in stocks: they wait until the final days of a bull market, rush in when it's peaking, then take a bath when it collapses.
This last factor - participation by the retail investor (vs. the institutional investor) - helps explain the three phases of a bull market, with the last phase being the most manic, and therefor the most powerful. When the retail investor piles in, prices jump as if on steroids. So we should take note now that stories of renewed interest in stocks by the average investor have begun to appear. Stock funds and ETFs have benefited handsomely as a result.
So if all the above makes sense, and you've been either out of or light on stocks because: fundamentals have been rich; the economy has been weak; the bull market is long in the tooth; or any other reason, is it now time to jump in and ride the bull's final phase?
Ah, grasshopper, alas we don't have any words of wisdom for you here. After all, momentum has a life of its own, and it's got nothing to do with what's rational, never mind anything at all to do with wisdom. What we can say is that if you believe that the final phase of a long bull market has begun and you're prepared to take the plunge with the understanding that you'll need some plan to get out of the way when things turn - as they inevitably will - then you've found a golden moment.
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