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Think Again

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Traders,

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.

#TeamTackle

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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.

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Video of the day

The Queen’s Court

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