Skip to main content

Sound Advice: June 2, 2021

Are stocks getting too pricey? 

If our only focus is on Wall Street and a stock market that seems to know only one direction, one might think that once again we're in a Goldilocks era.  Not too hot.  Not too cold.  Just right.

The hitch is that there's a lot more going on than what takes place during the midday trading hours of each weekday.  As usual, Congress is making a lot of noise and getting little done.  Israel is again jockeying for a change in leadership.  And, countries around the globe continue the struggle to get the pandemic under control.

Back in 1849, Alphonse Karr, editor of Le Figaro, said "the more things change, the more they stay the same".  Over time, people tend to repeat long-term behavior patterns, which is why history is an essential part of our educational curricula.  So much of what we are seeing now has already been done in perhaps a different fashion in the past.  The point is that there are developments and there are results of those developments.

All of which suggests that continuing market enthusiasm is overdone. These days, investors seem to be increasingly oblivious of the ongoing undercurrents that could derail the latest rise in stock prices.  As a matter of prudence, it's often a good idea to plan in terms of reasonable expectations rather than rolling the dice on an unlikely confluence of events that would be akin to the New Economy thesis of 1999-2000.  There wasn't any New Economy then and there certainly isn't anything analogous now.

Even so, the optimism on Wall Street bears close consideration.  This kind of pattern has happened before and will again.  Trees don't grow to the sky and there will be a time of reckoning.  The averages may not come crashing down, though the odds are that some time over the course of the current year there will be a correction of 10% of more.  Pullbacks of that sort are events that happen in most years and there's good reason to think that 2021 will not be an exception.

A key factor to keep in mind is seasonal strength.  It's well known that about two-thirds of annual gains are usually registered during the colder months.  So we're now just past the end of the annual seasonal upswing.  Add that to the relative richness of stock valuations resulting from post-election gains of the U.S. market and investors would be well advised to dial down the risk in their holdings, primarily on this side of the pond.

On Wall Street, there are bulls, bears, and pigs.  Don't be a pig.

"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute."        William Feather

 


N. Russell Wayne, CFP

Sound Asset Management Inc.

Weston, CT  06883

 203-222-9370

 www.soundasset.com

www.soundasset.blogspot.com

 

Any questions? Please contact me at nrwayne@soundasset.com

 

Comments

Popular posts from this blog

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections Through the spring months, m ost of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent. We are now in a recession.   The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimo

Sound Advice: May 13, 2020

Reality Check On the heels of the market plunge of late February and most of March, investors did a sharp about-face in April, bidding up shares at one of the fastest rates in recent history.  Although this recovery probably provided at least temporary comfort from the plunge, it would be unreasonable to view the rebound as a sign that things are all better.  They are not. For one thing, we are now in the midst of earnings reason, when companies report their quarterly results.  Some may have good news for the March quarter, but as we move through the current calendar quarter, only a few will be able to show continuing improvement.  Against the broad backdrop of U.S. business history, the months just ahead will almost certainly prove to be among the worst, from the standpoint of year-to-year comparison. With more than 30 million people filing claims for unemployment insurance, it would be difficult to expect anything other than bad economic news.  Who knows how many of these

Sound Advice: July 22, 2020

Fixed Income: In a Fix Typically, the construction of an investment portfolio has begun with an approximate balance of 60% in equities and 40% in fixed income instruments.   Fixed income generally means bonds, but that includes bond funds and exchange-traded funds holding bonds.   The equity portion is intended to be the driver of capital appreciation over extended periods of time and the fixed income portion is supposed to provide stable, albeit more moderate ongoing rates of return. The theory behind this approach is that as the time periods measured have lengthened, the relative risk of holding equities has diminished while the returns they have generated have been higher than those of other asset classes.   What equities do in the short term, even a year or two, is often anybody’s guess.    To the extent that fundamental analysis can help toward determining future equity values, investors need to look ahead three, four, five years or more before reasonably expecting t