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
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Halftime Report 12:30 PM EST
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Join us for a special webinar with the coaches where they’ll analyze some trade setups.
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