Technically Speaking: You Carry An Umbrella In Case It Rains

“From the viewpoint of long-term investment, major risks remain according to some long-term strategists. Yes, conventional wisdom on Wall Street tells you that stocks are likely to gain an average of around 9% a year. And yes, that’s based on the historic average going back at least to the 1920s. But, say some financial historians, that’s a misreading of the past. Stocks, they say, typically produced ‘average’ returns if you bought them at roughly ‘average’ valuations in relation to things like net assets and net income. And U.S. stock valuations today, they warn, are anything but average.

According to price-to-earnings or ‘PE’ data tracked by Yale University finance professor and Nobel Prize winner Robert Shiller, the S&P 500 is about 75% above its historic average valuation. ‘

 

Today, with valuations still near the most expensive 10% of starting valuations, 10-year forward returns will likely be very disappointing.

But, valuations are a “horrible” investment timing device. Which is why we use a specific set of price indications over varied time frames to determine short-term risk versus reward.

Currently, the markets are rallying. so we have to pay attention to what is happening now. As investors, we have to make money when the “sun is shining.” But that doesn’t mean to do it with reckless abandon, and as Brett pointed out, the same things that caused the sell-off in 2018, still exist currently.

  • Economic slowdowns in China and Europe
  • Rising interest rates
  • Trade war fears
  • Looming conflicts between a Democratic Congress and President Trump
  • Weaker corporate earnings.

(You wouldn’t lay on the beach butt naked on a blistering summer day without any sunscreen would you? You could, but the consequences could be painful.)

The same is true for investing. Currently, the markets are rallying on a lot of “hope” and short-term “optimism.”However, longer-term fundamental and technical indicators are suggesting investors take some cautionary measures.

This doesn’t mean sell everything and hide in cash. But it does suggest adding some portfolio hedges, raising cash levels a bit, and holding fixed income.

You may appreciate having an umbrella if it begins to rain.

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