Market too good to be true?

Hi! I am not an investor for a long time, however since I got Freetrade last April I got more involved with the market.
I am a bit worried at the moment as most stocks in January seemed to grow way too quickly and it has already been 10y since the last market crash.
What are your thoughts and expectations for the near future?
Thank you for the help to the more experienced investors :slight_smile:

2 Likes

On every metric US shares at least are valued very highly in relation to historical norms, this should give everyone pause for thought. Unless you beleive a new paradigm has arrived where the new normal is for shares to be valued very highly you shouldn’t be putting money in right now without being very ready to handle a drop in prices.

2 Likes

Good comment. However, people have been saying this for years now. So if you had waited for a crash, you would have never invested and missed all the gains. Time in the market beats timing the market. Nobody knows what’s going to happen. Just use dollar cost averaging.

7 Likes

I’m afraid the US market is - low interest rate + money printing + crowd buying anything that is popular without performing qualitative analysis are causing this mega trend.

UK is still relatively cheap.

For 2 decades FTSE was sideways. The breakout only happened recently.

Ben Graham:
“In the short run, the market is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine–assessing the substance of a company.”

4 Likes

Given historical comparisons they look expensive yes. However, by some measures stocks are at some of their cheapest levels. It all depends on how you factor interest rates into your analysis.

This is just a personal opinion but I wouldnt look at the market but more the company. If thay company is profitable, in an industry where it can also operate during a recession then it doesn’t matter. I am holding on to some cash and putting some into bonds as it is not as volatile. From research I have seen, dividend stocks did well during the last pull back compared to normal stocks.

A range of valuation metrics for different markets:
https://www.starcapital.de/en/research/stock-market-valuation/

Great article outlining a few valuation metrics applied to the S&P 500:
https://www.advisorperspectives.com/dshort/updates/2020/01/03/is-the-stock-market-cheap

Someone who likes a bargain:

4 Likes

Yes.

The S&P went up 29% in 2019, which clearly isn’t sustainable long term, nor a reflection of the US economy, economies in Europe are doing a lot worse than that, there are a lot of bankruptcies in retail especially, yet their stock markets are also not reflecting that reality. The Shiller PE ratio is quite a good indicator of this distortion:

https://www.multpl.com/shiller-pe

Note the spikes coincide with major crises.

A bull market like this can go on for a surprisingly long time though, and government interventions like low interest rates, low corp tax or QE (or variations on it), can seriously distort asset prices. So this may take at least another year to play out, depends on politics to a large extent and it’s very hard to time something like that. Personally I just rebalance things a bit so I have more commodities and cash at times like this, so that at least you have options if prices drop significantly. If you’re buying companies or indexes you’re sure can weather a recession, you should be in a good place even if there is one, as long as you don’t sell when things are cheap.

Interesting that the market has been realistic in some senses though - the IMO overvalued IPOs of various companies like WeWork, Uber or Beyond Meat in 2019 were at least repriced much lower soon after launch, which I find reassuring.

This is an interesting chart of S&P growth - as you can see if you view by year it does vary dramatically and growth rates of > 20% are not as unusual as I thought prior to seeing it:

You’ll always have arguments for or against. For instance, stocks still look amazing value when you compare them to bonds & interest rates.

Echoing this I will add…Keep calm & carry on. If you don’t use money you might need in the short term then you really have nothing to be concerned about.

4 Likes

Thank the US Federal Reserve and the $100 billion of liquidity that they are currently injecting into the markets each month to keep everything propped up. lol

Matt

1 Like

I don’t know about you lot but I miss the volatility :man_shrugging:t3::smile: struggling to find buying opportunities here lol

1 Like

I mean, yeah. This has single-handedly pushed through new long positions for me since it became obvious it wasn’t just a repo stabilisation.

The astronomical rise in the S&P500 only just covers last years pullback though. It is not like it has risen for two successive years. The rise was really a recovery rather than a rise.

2 Likes

To me a market crash seems well overdue and when it happens I think it will be the worst in living memory.

However for this crash to happen there will need to be a trigger event. Southern Europe? German banks? Marxist politician winning a big election? Until then I think central banks will keep running QE and topping up national debt burdens.

The Fed is pumping the markets with money so that banks can have enough liquidity over night (Repo markets). The stock market is being inflated because of all this cheap money. Unfortunately, the Fed is in a difficult position, they would like to raise interest rates but doing so may cause an economic collapse in the current environment.

Because of the low interest rates debt levels are sky high, corporations have been using cheap money for buybacks. At the moment the global debt is around $253 trillion (this includes global households, governments and companies).

Can you imagine raising interest rates on that amount of debt :rofl:
So far there has not been major inflation which would force the feds hand.

I am in stocks that I feel limit my risk, they will still go down if this bubble bursts but they won’t go to 0.
Also, I am long on gold and I have set up some orders to short the market if this bubble bursts which will trigger them.

Till then the party keeps going to infinity and beyond.

3 Likes

For the S&P, from the peak in September 2018 until today, we are up around 12%.

https://www.guggenheiminvestments.com/putting-pullbacks-in-perspective

So the saying goes “Don’t fight the fed” :sweat_smile:

I find these weekly Refinitiv videos quite a good way to get a view on what people think is currently going on in the markets, https://youtu.be/JywRcQeyOuM

Matt

1 Like

I think there is a very simple way to look at this. The market is the market and if you invest for the long term, history shows, you should make a return on your investment. Trying to wait until drops in the market or avoiding investing due to the prices appearing inflated will just hinder future investment progression as you will never successfull (over a long term) time the market.

As Nick Murray said, “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.”

1 Like

I think the dont time the market quotables should be seen as applicable to those who attempt to predict short term movements. I think making a decision to hold off investing when something is at 25xP/E because you dont think 25xp/e with little growth is a good deal is not timing the market.

3 Likes