People are Working, Traveling, Spending and Investing in Stocks
$DIA, $SPY, $QQQ
The post-election Trump Rally has taken stock market indexes to all-time highs, and the recent gains raise some interesting Q’s.
Below are some thoughts on the action that you may find useful, as follows:
Sentiment: Has spiked as the market has run up. I use the AAII sentiment indicators and publish them weekly as announced. They may imply that a short-term pullback is due.
Valuations are elevated: Markets are overvalued relative to historical averages. This may be true, but it misstates an important fact. Markets are rarely fairly valued. When stocks are undervalued, people can be too nervous to put capital to work; when they are expensive, they are reluctant to overpay.
Pricey markets often become pricier, cheap markets often become cheaper. It is important to understand that markets are at fair value for only the briefest frames. Then they move, staying cheap or overvalued for years at a time.
Earnings: It may be counter intuitive, but consider this: markets are forward looking and valuations look elevated sometimes because the economy and corporate profits have to catch up with prices. That is what the 1st 3 Q’s of this year were about, US stocks prices were little changed as they waited for earnings to rise enough to justify valuations.
Then there’s the CAPE ratio: This is Yale economist Robert Shiller’s measure of cyclically adjusted PE/R (price-to-earnings ratio). On CAPE: over the past 25 years, the CAPE ratio has been above its historical average 95% of the time. Stocks have been below their historical average just 16 out of the last 309 months. Since that time, the total return on the S&P 500 is over 925%. Meaning CAPE is a useful guide to give you some ideas about future expected returns, but as a market-timing tool, it is of little use.
New market highs are Bullish: Of all of the factors demonstrated to generate returns; momentum or trend is misunderstood by many investors. Think of it this way : which is the better way to generate gains, investing in markets that reach new lows or new highs?
The Election is over: It seems everyone is enthusiastic about Donald Trump’s victory and his plans to cut taxes and roll back regulations. Back to Sentiment.
I believe that Donald Trump will make America Great Again, many people are relieved that he not Hillary Clinton is our new President.
People are now working, traveling, spending and investing in the stock markets.
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