If it bleeds, it leads and in the investing world that means finding someone willing to call the market top. There are plenty of statistics and charts that show the market as being over-valued pretty much since the end of the financial crisis. While we can identify how the market looks relative to the past, the information is less useful in predicting the future.
I’ve been critical of Cyclically Adjusted Price/Earnings (CAPE), but I do watch this and other valuation metrics as I think they provide information about the markets and market participants. I don’t think any one of these fundamentals provides actionable information, however. That is to say it would be unwise to try to time entry and exit in the market based on these statistics. I feel the same way about charts. It seems to me that you can overlay a chart from any time period and make it look just like the chart from 1929 or 1987 or whatever you want the answer to be. Some people swear by charts. They’re in my too hard pile.
The US stock markets have risen dramatically after the election even as already-low volatility dropped lower. That’s great, but long, steady marches like this are unusual. Beyond Warren Buffett’s pro-USA letter to shareholders (required reading), I am not seeing much written about why the market could go higher. I’m a bit on edge after the latest run-up and wanted to know if there is any reason to stay invested right now, let alone invest new money.
What Could Go Right
Headlines after the election were less than enthusiastic about pretty much anything and yet the market rallied. President Trump struck a more conciliatory tone the other night at the joint session of congress, but that shouldn’t bring down the wall of worry the market has been climbing. We are still far from the euphoria that typically signals a market top (people quitting their jobs to become day-traders, TV channels dedicated to flipping houses, etc). What exactly would euphoria look like today?
The S&P 500 yields around 2% as the 10-year US Treasury yields only slightly more. US government bonds are the premier asset to hold during a flight to safety, but in the meantime the upside potential of stocks is a huge opportunity cost for bondholders. Rates are still at emergency-level lows. The Federal Reserve is expected to raise rates 3 times in 2017, but their past actions show they will be reluctant to do so. Even if the Fed raised rates 50 more basis points this year, it would not be shocking and there is little to suggest that they would surprise by hiking more than 25 bps at a time.
Long term returns are still below average. Historic returns for large cap stocks is 10%. The S&P 500 is up an annualized 7.6% over the last ten years. Historic returns for small caps is 12%. The S&P 1000 is up 9% over the last 10 years. This tells me that there’s still room to run just to get long-term returns back to historic averages.
In The End
What will happen? Who knows. None of this stuff predicts future market movements. The market is like my son. I could come home and find that he has cleaned the living room and he’s sitting quietly reading a book. Or I could come home and find that he put sunglasses on the dog and tried to paint the cat. Whichever way the market moves, a long-term plan helps us enjoy times of quiet and keep smiling when the market jams a waffle in the DVD player.
The Most Populous Nation on the Planet: Procrastination
On a completely unrelated note: The Wall Street Journal has a monthly feature where they ask six people about a topic and post a paragraph of their thoughts. February’s topic was procrastination. First, I’m disappointed that not one person missed the deadline due to procrastination. That would have been an apt commentary. The other thing that struck me was that all six talked about how they tackled procrastination. There was no talk of the value of putting off until tomorrow what can be done today. Advances in technology have provided us with so many ways to organize our lives (apps, smartphones, etc) that it can be easy to turn our days into one big To-Do list. This is not living. There is value in taking time out to just relax and if you have ‘relax’ on your To-Do list, you’re doing it wrong.