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Stocks Have A Long Way to Rise
As in every cycle, there are many pundits who are crying ‘wolf’ by warning that a precipitous drop in the value of stocks is imminent. They use charts, magical portions, and nonsensical interpretations to prove their theses. If one followed this type of analysis in previous cycles, the investor would have missed most of the subsequent upside and would have sat on the sidelines watching everyone else making money.
A Picture is Worth a Thousand Words
A chart published today by Business Insider says it all.
Each cycle gathers steam as it slowly gathers strength. Then it becomes a bit aggressive and then things start getting out of hand, and values then start skyrocketing – until they are so high that they defy all logic. Then they crash. We haven’t even gotten close to that part of the cycle yet..
The following are direct quotes from the narrative published by Business Insider accompanying the dramatic chart above.
“The current 12-month forward P/E ratio is 16.8,” FactSet’s John Butters said on Friday. “This P/E ratio is above the 5-year average (13.8) and the 10-year average (14.1).”
But just because stocks are expensive relative to their long-term average is no guarantee that prices are doomed to fall immediately. Indeed, there are many instances in history when stock prices continued to rise and valuations continued to stretch for years before they corrected and reverted to the mean.
“Market multiples rarely trade at average levels,” Morgan Stanley’s Adam Parker once said.
The answer is obvious. Stocks are currently within an average valuation when compared to any reasonable previous period. There is zero IRRATIONAL EXUBERANCE. There is no bubble. There is no dramatic drop in prices on the near horizon.
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