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Tackle Today: Thinking of using Valuation Metrics to Time Your Investments?

April 14, 2021

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Think Again


Stock prices are high these days. The S&P 500 trades with a forward P/E ratio of 21.88, which is the highest reading since the dot-com peak in 2000. Some pessimists point to the rich valuation as a reason to avoid buying stocks here.

Here’s a list of problems I see with this logic.

One: valuation is a terrible market-timing tool for short-term market movements. Valuation measures can remain stretched for long periods. And they can extend further.

Two: There isn’t exactly a good alternative. Cash pays nothing. Bond yields are in the tank. Real estate is expensive, and Bitcoin subjects you to insane volatility.

Three: It could be years before a valuation reset arrives, and if prices rise enough in the interim, you still might be buying at higher prices than is currently available – even after a bear market.

Instead of worrying about lofty price-to-earnings ratios, focus on building an all-weather portfolio and trading systems with contingency plans for downturns.


Chart of the Day

Cue the Debbie Downers

J.P. Morgan’s freshly released Guide to the Markets includes a chart showing the past 25 years of market valuation. There’s no denying stocks are richly priced. But that doesn’t mean they won’t go higher.

Video of the day

The Queen’s Court

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Cash Flow Condors 8:30 PM EST

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Halftime Report 12:30 PM EST

The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.

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