Sound Advice

  When asked about the stock market, J.P. Morgan responded: “It will fluctuate.” And indeed it does. One of the major influences is the level of interest rates.   When rates are rising, stocks tend to be weak.   When rates are easing, stocks tend to strengthen.   See the chart below which shows the relationship between price-earnings ratios (valuations) and interest rates from 1880 to 2010.   The extreme case was 1981, when prevailing rates were in the mid-teens . . . and the market was in the tank.   Then as rates eased stocks regained their footing. This ties in to the reality that even though one can calculate a normal valuation (price-earnings ratio) for the stock market, it almost always trades at a premium or discount.   Typically, the stock market will gain strength and wider valuations when business earnings are climbing and interest rates are moderating.   And vice-versa. Depending on your source, you may learn that the normal v...

  Sell in May. Buy back in October?   A lookback at the quarterly returns of the Standard & Poor’s 500 Index clearly confirms that stocks generally deliver the bulk of their annual gains during the first and fourth calendar quarters.   There are numerous explanations for this bias, but whatever the reason it can be taken as a given. Market strength in the fourth quarter would certainly be influenced by holiday season buying. This is when retailers generally have the highest level of profits. Indeed, some retailers operate in the red straight through until the fourth quarter.   And, of course, that’s the time when folks tend to be more willing to spend.   If the retailers are doing well, it makes sense to expect that their suppliers are also doing well. Aside from the seasonal factors involved, there are other issues that are equally or even more important.   Consider the prevailing trend in interest rates, which if rising tends to put pressure o...

Wall Streeters Have Comments on Everything.  Ignore them. In my early years in this industry, I had the good fortune to work alongside many extremely bright people.   They all had something to say, but one comment stood out: “You may be a fool, but you don’t need to prove it.” Keeping that in mind, my daily reading of the silly noises coming from the exalted levels of the financial community always leads to amusement.   Whichever the medium, the outpourings, with rare exception, are embarrassments. There’s certainly nothing wrong with commentary on daily markets or the economy, even though the ostensible reasoning may be questionable, but when the verbiage gets into thoughts about what lies ahead, that becomes a guaranteed minefield. Here are some interesting quotes: “Today’s market uncertainty is a reminder of the value of humility.” How is that helpful? “It does feel like an inflection point where things could go either way.” Translation: The market coul...

THINK TWICE ABOUT BETTER BUSINESS BUREAU RATINGS   Although it might be comforting to believe that ratings from the Better Business Bureau are reliable, people would be best advised to avoid betting the ranch on same.   Indeed, there are more than a few reasons not to rely solely on those ratings. Contrary to popular belief, BBB ratings do not measure how good a business is.   Instead, they are supposed to measure how likely a business is to respond to its customers. The key factors ostensibly underlying the ratings are things such as complaint history, type of business, time in business, transparency of business practices, willingness to uphold BBB standards, licensing, and advertising.   If, for example, a license is required, but the business is not licensed, the rating would drop.   Similarly, use of the BBB logo without permission from the BBB is a no-no. But there’s more and that’s often the key.   Although the BBB presents itself as a nonpr...