Lest I appear to be a complete “Pollyanna,” I thought it would be useful to point out that, yes, there are many negatives facing the market: some real, some imagined and some not yet foreseen. I subscribe to the old saw, “no tree grows to the sky.” I am acutely aware that the current, unabated move in the market is overdue for some real corrective action. The question is not if, but when?
“A Correction Is Coming!…”
Back on April 5, 2013 we published session 20 “A Correction Is Coming! When And How Bad?” The Friday before the S&P 500 had closed at 1614.42 (14% below its close of this last Friday January 10, 2014). The title was a reflection of the common media wisdom of that time: The market had moved too far, too fast. Stocks were overvalued. You should be selling, not buying!
My position back then, as it is now, was that corrections were normal and they should not be feared. I also asserted that versus the ten-year U.S. Treasury yield of 1.77% stocks were attractive. This is the case today, even though the ten-year is yielding closer to 3.0%. I believe we should view the market through the prism of moving out of a thirteen-year period of ZERO returns from stocks, rather than focusing on the sharp recovery we have had from the panic lows of 2008/2009. In other words stock fundamentals have improved dramatically since the ‘bubble’ top of 2000, while the S&P is up, in total, 20% over that 13-year span (about 1.5% per year). The PE on the index is down from 29 to 16. Plus, corporate balance sheets have never been stronger. To me stocks still look interesting, even as ten-year rates approach 3%. Having said this, in light of the uninterrupted move we have had, it is hard for me to push people up to buy stocks right this minute.
Predicting is a very tough game.
For example, I believe as outlined in session 7 (“My Biases…”), we will have to deal with significantly higher inflation somewhere down the road. When? That is hard to pinpoint; but, I believe you should be prepared. Preparing for inflation calls for owning assets (common stock being one alternative); and, if you have good economic purpose, borrowing money long-term at low rates. You do not want to be a lender. As to owning stocks (i.e. owning businesses) there is considerable empirical evidence favoring this asset class as a long-term hedge against inflation.
As it pertains to a correction, I can with great certainty tell you we are overdue for a major one. Forecasting the catalyst, when or how deep it will go is impossible. Also, we might move even higher before any downdraft sets in. Seasonality might play a role here as we move into the spring of the year…you know ‘sell in May and go away’. Whatever the cause, it will be scary, normal and may present investors with opportunities to deploy funds.
The Stopped Clock Syndrome
The naysayers of a year ago are still the naysayers. One in particular, Jeff Sommer with the New York Times continues to pop up on my radar. “A Streak Has Ended, but the Echoes Haven’t” (NY Times 10/12/2014) captures his current negative slant, which really has not changed much in the last year. For reference on Sommer’s past dire pronouncements see session 8 (“a Masterpiece of Uncertainty…”) and session 22 (Latecomers Flocking…). His most recent work comments on the coincidence that the market closed the first trading day of 2012 and 2013 (both very good years for the market) on a positive note (a string). For shame, that string was broken in 2014. Oh yes, and he quotes a source stating that the market had gone from undervalued last year to overvalued. Of course, Sommer was saying that last year too. Oh well, even a stopped clock is right twice a day.
What do you think?
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