Skip to main content

Sound Advice: December 23, 2020

The Stock Market’s Too High . . . and it’s going higher.

Over the many years I’ve been a stock analyst and money manager, I have periodically heard the words of the song that never ends: “The stock market is too high.” The first time I heard it was back in the 1970s, when the Dow Jones Industrial Average was meandering through a 15-year channel in which the high-water mark of 1,000 seemed to be an impenetrable peak. 

Then in 1982, the Dow finally managed to break through and continued to rise almost nonstop until October 19, 1987.  That was the day of the Great Crash: The averages dropped more than 22% in one day.  Even so, by the end of 1989, only a bit more than two years later, Dow had recovered all of that loss and added another 500 points, rising to 2,753.20.  As of this writing, it stands at 30,216.45, a gain of approximately 1,000% in 31 years.

Are stocks undervalued, fairly valued or overvalued?  That depends on which stocks you are looking at.  Typically, the faster companies grow, the more investors will pay for their shares.  So it comes as no surprise that mega tech companies such as Apple, Amazon, Facebook, Microsoft, Netflix, and Google all have high valuations.  The hitch is that these companies account for a disproportionately large share of the leading indexes, which makes the indexes look richly valued.

It might be more helpful to view the indexes in two other ways.  One would be an evaluation of the companies included on an equal-weighted basis.  Such an appraisal would still yield a relatively rich valuation, but one that would not set off an alarm. 

The other would be an evaluation that excluded the companies noted above.  These are the companies that felt the full brunt of the pandemic.  Their current-year profits will be about 15% to 20% lower than those of 2019.

The good news is that the new year may bring a full rebound to the earnings level of 2019 and a further impressive advance may follow in 2022.

Either way, the smart bet is that the Dow will hit 50,000 before it goes to zero. 

N. Russell Wayne, CFP

Questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...
Post a Comment
Read more

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...
Post a Comment
Read more