Where is the market going?
March 14, 1998 - © Copyright 1998 Sheldon M. Bell
If you read the financial news or watch CNBC you certainly can get your fill of what the experts and pundits have to say as to what lies ahead for the stock and bond markets. There are always enough bulls and bears around no matter what cycle the financial markets are in.
The experts always try to interpret the financial data available at any given time to get a handle on what is to come. Conventional wisdom states that when the unemployment rate is below 5% as it is today (4.6%), then inflation will accelerate. Then why is inflation the lowest in decades, and as such, bond yields are at historic lows?
By all gauges of value, the stock market is terribly overpriced today with the PE ratio of the SP-500 at about 26 to 1, and dividend yields the lowest in history. Then why is the stock market hitting new highs every day, and rebounds strongly after each sell-off?
With the bull market 7 years old, perhaps we should cast away all caution and assume making money in the stock market is a no-brainer and continue to buy the overpriced stock available in order to bid up their prices to the sky. Perhaps the fear of the Asian financial crisis and the potential negative effect on our multi-national corporations was misplaced in October last year, when the stock market declined 7% in one day.
Perhaps the greed and carelessness of most investors will be rewarded with ever increasing returns of 30% per year forever and ever without doing their homework.
Perhaps all this is not true, and the investors that work hard at selecting the financial assets that are appropriate for their situation will be the ones to prevail. The investors who have the right mix of stock, bonds, and cash to accommodate their financial agenda. The investors with a diversified portfolio that rebalance their portfolios periodically. The investors who don’t listen to their friends, relatives, or stockbrokers about the next hot stock that can’t miss.
It is my opinion that greed will not prevail in the long term, just hard work, as effective money management certainly is.