Posted on 06/12/2021 7:37:41 AM PDT by BenLurkin
1. Historically high valuations are bad news
To begin with, the widely followed S&P 500 is pricey...really pricey. As of the close on June 7, 2021, the Shiller price-to-earnings (P/E) ratio for the S&P 500 hit 37.5. The Shiller P/E, also known as the cyclically adjusted P/E (CAPE) ratio, is based on inflation-adjusted earnings from the previous 10 years. This reading of 37.5 is well over double the average Shiller P/E ratio of 16.8, which dates back 151 years.
2. History says we're in trouble
Looking back 61 years, there have been nine bear markets. In the previous eight bear markets...there were either one or two double-digit percentage declines within three years following the bottom. In aggregate, we're talking about 13 double-digit drops spanning the three years following these eight bear-market bottoms.
3. Crashes and corrections happen frequently
According the market analytics company Yardeni Research, there have been 38 separate instances since the beginning of 1950 in which the S&P 500 has retraced by at least 10%. Put another way, we observe an official correction or crash in the benchmark index, on average, every 1.87 years.
4. The Federal Reserve can't remain dovish forever
One reason equities have rallied so ferociously off of the March 2020 bottom is the amount of support they've received from the nation's central bank. The Federal Reserve has stood pat on historically low lending rates and continued with its monthly bond-buying program that's designed to weigh down long-term yields.
5. Margin debt is skyrocketing
Perhaps the most terrifying fact of all is the current level of margin debt. Margin is the debt that brokerage customers take on to buy equities. Consider it a way to leverage their gains, as well as their losses, if they're incorrect about which way a stock will move.
(Excerpt) Read more at fool.com ...
In a rising interest rate environment, they will be clobbered hard.
Let’s say that today you buy $100,000 of 10 year government bonds yielding $1,000 per year (1%).
Then inflation skyrockets and the Fed and the market drive the required interest on 10 year bond to 2%.
What is your $1,000 annual interest payment worth in a 2% world? $1,000 / 2% = $50,000.
You just lost half your money.
How do you feel about government “securities” now?
Pardon my lack of stock market knowledge, but wouldn’t it be better to sell and then buy the same stocks again when the prices have hit the bottom?
“never sold in a panic”
I wish I could say the same. Nobody taught me to stay the course in stormy weather. I bailed out twice and got back in WAY too late. My retirement portfolio is probably half or 60% of what it would have been if I had not panicked.
I finally hired a financial advisor who set me straight. He showed me some great analysis of how being just a little bit late on market timing (both at top and bottom) really ruins your long-term returns.
Up and down. You probably can’t time the market. Usually less than 3 years from fall to recovery to a similar point. As an investment you just wait, as income producing assets I guess you diversify or something. Not sure I know the secret sauce. I deal with it through an old annuity but today I suppose bonds or dividends maybe.
Eventually it will fall. It always does for one reason or another. This time it will fall because the reason it went up has gone away, Donald J. Trump. The policies and plans he had inspired a hopeful outlook from lower taxes to a leveled trade landscape and even trade protections. Plugs is taking an axe and a wrecking bar to all that Trump accomplished. The fed can’t keep rates low forever either. They only have one way to go.
I”m afraid this will not be a normal dip when plugs policies and Trump’s demise catch up with profits and they will. We have had the upward correction from the malaise of the obama era and even bush 2 and now we will see the downward one to swing around the mean of 6 to 8% log range returns.
I don’t want to see the market fall but I do want to see the insanity of the realestate market and some others meet their Waterloo. Markets like this only do a certain few well. They inspire tax collectors to make a temporary condition permanent pain. Ditto with insurance and other costs of ownership.
I probably won’t sell much as before but instead do some balancing as usual. Being fully invested and retired I don’t have money to buy the dips and so stand pat.
We really don’t have choice about how things are but only how we respond to them.
I do not count the wuhan flu ass a “crash”.
That is biological warfare.
I hope so. I’d like to buy some bargains. I bought carnival at 12 and made a bundle. Exxon at 27 and is doing well thus far. The pandemic was great for good price buys. But everyone could always use more.
Anyone over 55 or 60 might want to consider other alternatives besides the stock market such as moving to CASH, precious metals, ammo, property, etc..
I think EVERY sector will be negatively impacted due to Biden's SABOTAGE of America, the question becomes "what sector will be LEAST affected?"
CASH will be worth LESS due to reduced BUYING POWER.. The market will likely also be depressed.. What to do?
The OLDER FREEPERS need to plan accordingly.
Excellent Post!
Words of wisdom my Father taught me decades ago. 👍🍻
Your post explains why buying individual bonds is a bad idea in a low interest rate environment. But sitting on cash is also not a good idea. Investing in a BOND FUND might be a better option — because it holds various types of bonds with various rates and various maturities, and is always buying new bonds at current interest rates. As a result, it doesn’t get hammered very hard when rates double from 1% to 2%.
Amen brother amen
The problem becomes real if like us, you are old.
The market will recover...... it’s America.
The question for an old guy is will it be timely?
Too bad. It is an easy and accurate calculus. Miss a bit on either or both ends and it can work our badly with no second chances. At most I trade near equally valued poor performers for better ones in a down. That usually works well enough.
It is hard to hold and keep your powder dry when all are in a panic around you. Best to walk away or try to find a good manager. That is another tough call that is hard to recover from if you choose poorly. Time is not your friend in those cases. It is equally hard to stay to your base hit strategy. if you have one, living with gains lower than the swing for the fence one hit or so wonders. One is very exciting when it is good but I prefer steady progress with less drama either way. Not sure which is best. Both can work.
I hold that everybody loses in a cyclical crash with inflation. Everyone gets killed.
So while cash is incredibly stupid until the day of the crash, it is incredibly wise the day after the crash.
Selling stocks into a crash is stupid.
Really, though, who is the winner? The feds who now have a debased currency to pay off their previous profligacy? Maybe.
I have no proper advice right now. I think we are primed for an “everyone loses” “house wins” scenario.
BiteMe is the useful idiot poster boy.
Deep State is the reason.
The republic is dead.
We are in terra incognita now.
We haven’t seen anything remotely like this for a couple of centuries.
Folks pretend past is prolog at their peril.
...prologue...
The same pain or gain is spead like peanut butter, both upwards and downwards.
Even the Uncle Sugar Pipeline will fail to hold up the economy forever.
Sorry to make an object lesson out of you, but I was always amazed to see this kind of post on a website like FR where I would assume people know better.
Fear and greed are the two worst emotions for investing. Someone who can’t control BOTH of these has no business sailing from the port in the first place. Add a large dose of ignorance to the mix, and you have a scenario not much different than a drunken 5th grader driving a school bus.
Yes, but only if you knew exactly when prices are going to drop and when they are going to rise (and when they actually hit bottom). And no one does. The only (fairly) safe bet is that over the long run they will rise.
Back in January 2020 I predicted that the U.S. stock market would do very well in a Biden administration. My rationale was simple. The guy has been a corrupt b!tch on the leash of corporate America for decades, and can always be counted on to do what’s in their best interest.
“It is hard to hold and keep your powder dry when all are in a panic around you.”
That was probably my biggest mistake...I held and held and held, then finally succumbed to panic and bailed, only to watch the rebound start not long thereafter. I then futilely waited for the next “second dip” to come to catch that, but it never materialized, of course. Those were really hard lessons.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.