Skip to main content

Sound Advice: May 22, 2024

 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 valuation of the Standard & Poor’s 500 Index is between 16 and 18 times earnings.  But the index is rarely at a normal value.

At the time of this writing, the price-earnings ratio of the index was 24.8 times, well above the typical level considered normal.  Maintenance of this level will depend on prospective easing in interest rates and continuing advances in corporate profits.

 

N. Russell Wayne

Weston, CT

Any questions: please contact me at nrwayne@soundasset.com

203-895-8877

www.soundasset.blogspot.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: February 21, 2024

800-000-0000 That’s 800-000-0000 Again, 800-000-0000 That’s the typical closing for the hard sell commercials that are increasingly polluting media airwaves.   These are the commercials for products or services you rarely need or most definitely should avoid. A substantial number are on behalf of groups of attorneys who would have you believe that you and many others may be entitled to cash compensation for having used or being exposed to some evil item or substance some time in the last few decades.   The pitch always includes a comment that there’s no cost to you unless there is a settlement in your favor. Much of this is rubbish, but when the appeal suggests that there’s nothing to lose, why not take a shot.   And, as you would expect, “advisors” are standing by 24/7 to take your call and help get the process in motion.   What kind of advisor would be available at 3 a.m.? One version of this approach pops up every year between October 15 th and Decemb...
Post a Comment
Read more

Sound Advice: September 21, 2022

The Professional Approach To Stock Selection There are various approaches to stock selection, but the two that predominate are fundamental analysis and technical analysis.  Fundamental analysis is a numbers-based method that evaluates key factors such as income and financial health, including the past, present, and future.  Technical analysis emphasizes movements and formations of stock prices. Fundamental analysis is based on factors that over time have proved to have a meaningful impact on stock price movements.  The optimal picture of corporate profitability is steady growth, both in the past and, prospectively, in the coming years.  Steady growth is rewarded by higher valuations of underlying earning power than those accorded companies with erratic progress. When professionals screen (filter) the data of the broad universe of stocks, they look for companies that move ahead every year, regardless of the prevailing economic conditions.  Although high pas...
Post a Comment
Read more

Sound Advice: July 26, 2023

Is Day Trading a Good Idea? Day trading can be both exciting and potentially profitable, but it also comes with significant risks and challenges. Whether it's a good idea depends on several factors, including your financial situation, risk tolerance, time commitment, and knowledge of the markets. Here are some considerations to keep in mind: Risk and volatility: Day trading involves buying and selling securities within a short time frame, often within the same day. This exposes you to the inherent volatility and risks of the market. Prices can fluctuate rapidly, and unexpected events can have a significant impact on stock prices, making it challenging to consistently make profits. Time commitment: Day trading requires a substantial time commitment. It involves closely monitoring market movements, conducting research, and executing trades. It can be stressful and demanding, as you need to be actively engaged in the market during t...
Post a Comment
Read more