I have certain beliefs about the markets. Every investor does despite frequent proclamations by the wizened to "remain agnostic" or better yet "let the markets tell you what to do." I believe that markets cycle between overvaluation and undervaluation. Periods of strong returns are followed by periods of weak ones. We have gone through such a decade of weak returns in the S&P 500, the large cap index of stocks.
At its March 9, 2009 nadir the S&P 500 had declined 57% from its peak. It has rallied 67% since then to finish Friday at a new interim high of 1145. Now what?
Well I won't join the list of prognosticators who attempt to tell you at this time of what the market will do in the next twelve months. This is the wrong forum for that. We are interested in the topic of investing in the context of FINANCIAL PLANNING. Earning "Top Forecaster" status is for someone else.
So other than the raw numbers I cited above, where do we stand? I am going to point you to the work of economist Andrew Smithers again of Smithers & Co. He has published two fine works on the markets "Valuing Wall Street" and "Wall Street Revalued" both of which I urge you to read. You can't get a better dissection of much of the nonsense that Wall Street and analysts peddle in the hopes of selling you stock. Here is what Smithers thinks:
Forty-eight percent overvalued.
If you need help in figuring out what to do with this information (if anything) please re-read my piece on "^The Duration of Stocks".
And, as always, see your trusted advisor or tax professional for advice.
ADDENDUM:
Reader "Sleepless" submitted a comment containing a link to a great interview with Andrew Smithers performed by Jim Puplava of Financial Sense Online. Have a listen. The link is here. Look for the entry in the January 9th program for Guest Expert and choose your media player of preference.
Smithers is worth reading....and worth listening to as well. If you go to www.financialsense.com, click on Broadcast, and look for the January 9th listing, you'll be able to download the 45 minute audio interview of Andrew with Jim Pulava (there a 5 separately downloadable files on that date - the last one is Smithers under "Guest Expert")
ReplyDeleteAs for a 2010 forecast.... all I'll say is that "something will happen". IMO we're in a big inflection period (no news there), and a study of the anecdotes of history provides some, but imperfect guidance. FWIW, I have a hedged portfolio, and will be venturing from that cocoon as opportunity presents itself. It is definitely all about "durable wealth".
~Sleepless
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ReplyDeleteThank you for that contribution. Smithers is not a press hungry individual so I think that interview is significant for that fact alone!
Fascinating audio.
ReplyDeleteIn the 2:30+ minute, there is this great quote from Smithers, IMO:
"Commercial bankers are not blameless for their own mistakes. But if I can do perhaps an unkind but useful analogy with burglars: both burglars and commercial bankers benefit by taking risk, and in some cases the risks that they take - in fact in all cases virtually - the risks that they take if they are burglars are anti-social, but often equally so if they are commercial bankers. When they take excessive risks it has negative social consequences.
“However, if you get a sudden, vast increase in burglaries, you don't actually suddenly assume that burglars have become a great deal more wicked than in the past, you almost certainly will assume that the opportunities for burglary or the drive to do so have significantly gone up; It's an external; not a change of heart of burglars. The same thing really applies to bankers - when bankers start committing vastly more social damage than they did in the past, it’s almost certainly not going to be because there is a sudden change in the morals or skills of bankers. It’s because they have had excessive opportunities to do damage.
“Basically, the old story is correct: IF YOU GIVE BANKERS ENOUGH ROPE, THEY WILL HANG THEMSELVES; AND IF YOU GIVE THEM TOO MUCH, THEY WILL HANG US AS WELL. And the people who mustn’t give (commercial) bankers too much rope are the central bankers".
“And that I say is the essence of the error from which we are currently suffering."
~Sleepless