Mastering The Irrational Market
Dear Wealth Watch Reader,
The market is still topsy-turvy.
But a little history provides great insight that will help you weather the storm.
Read on below…
Market Update: Can Profits Grow Into the Stock Market’s High Valuation?
I’ll be right upfront with you, this is a bad news, good news story.
First, the bad…
In a recent article I updated you about my thoughts on the crazy volatility we’ve experienced, by saying one of two possible scenarios should play out for stocks:
- A “V” shaped bungee-jump down, and then right back up to new highs for the stock market, or …
- A frustrating trading range, with more up-and-down price swings in the months ahead.
While door #1 remains my personal favorite outcome, I have a sneaking suspicion that we’re dealing with door #2.
The S&P 500 produced a strong rebound rally last week, no question, which carried over this week. But the blue-chip index hit overhead resistance around 2,750 this week, as selling pressure picked up short of the old highs.
So, is this a major cause for concern? Not really.
After such a drubbing as stocks experienced it’s only natural for investors to take a step back to reassess after the wild price swings.
The market is now struggling to get a handle on how many Fed rate hikes to expect this year, plus investors are wary about the recent jump in bond yields.
And in the background is the stock market’s already rich valuation. But are stocks irrationally overpriced today? Not by historical standards.
Recall former Fed Chairman Alan Greenspan remarks about “irrational exuberance” in the stock market were delivered in December 1996.
But the S&P went on to zoom more than double over the next three years!
The lesson learned is that markets can remain irrational much longer than you think, and you don’t want to miss out on all the gains when stocks make a parabolic move higher, regardless of valuations.
Now here’s the good news that can support stock prices, and may even kick off another parabolic move higher for the market soon.
Corporate profits are expanding at a record pace. For the most recent quarter now being reported, three-out-of-four S&P 500 companies have beaten earnings estimates. Profits for the index are up over 15% year-over-year, the fastest pace of earnings growth since 2011.
Even better, management teams are guiding earnings estimates higher for 2018. In fact, the consensus estimate for this year’s S&P profits has been increased nearly 8% since December, 2017!
As a result, the stock market’s Price/Earnings ratio (P/E) has actually declined, to 17.4 today, down from 18.6 just two months ago! That’s not irrationally expensive by any means!
Bottom line: Investors may need some more time to digest recent volatility before diving back in.
The stock market could stay range bound for a while between the old highs and the recent lows — bouncing back and forth until the next catalyst sends share prices even higher.
Stay tuned, and stay invested for now in high-quality dividend stocks that are attractively valued!
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
Editor’s note: How are you faring in today’s market climate? I want to hear from you! Send your emails to WealthWatchFeedback@AgoraFinancial.com.