A Simple Stock Market Indicator
Many of you know that I read Bloomberg news regularly. Any subscriber gets an email each morning and evening with a few bulletpoints suggesting which is the most important economic news of the day. Some of it is benign and some rather telling. Everyone seems to want specific advice but general indicators are far more important for long-term planning. Last week, the bulletpoint below mentioned something that I feel has been very important to keep in mind for the last year especially and well before that if we are being honest.
The stock market has been shooting up but teetering at every record, suggesting mass uncertainty in the investment community. The Federal Reserve pledges more money printing that should help us all avoid mass calamity in the stock market and overall economy. This is nothing new since we’ve seen about the same thing happen in every administration over the past 40 years. A good stock market has been bought and paid for with an endless expansion of the national debt.
The longer it takes for a bubble to burst, the bigger the collapse. At this point we are running on hope with very few fundamentals to back it up. The S&P 500 has recently traded as high as 40 times earnings per share. When the ratio is high, you are paying more for less expected growth, indicating much more risk. When the ratio is low you pay a lower price, with theoretically less risk and can expect more stability in price. The average PE ratio is just under 16 and it has only been higher than now twice, in both 2001 and 2009. Food for thought…
It certainly could spike higher but again that just means the other side will be more dramatic. As you consider all options, think about what’s really driving prices today. Is it government intervention or true economic health and prosperity? Will the stimulus bill provide even more phony money to keep the party going? That remains to be seen given that much of the money is earmarked for foreign countries.
I am not trying to tell anyone what to do. This is just a simple indicator that should be considered if long-term financial health is your concern. Fear and greed drive every financial decision and that may always be so. If you’d like to talk about it then give me a call.