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
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