How to Play the Market in the Current Environment?I have been on record here as predicting that we will see the beginning of a recession in late 3Q or early 4Q of this year. My rationale for this prediction has been well documented here and I will not go through all that again.
Right now the market is saying that I am wrong about this. The market sentiment is in the Excessive Greed category and the VIX is in the "don't worry - be happy category".
So let's forget about whether there will be a recession or not. Let's ask the following question -
Is right now a good time to buy stocks?
1....A general rule for success in the market over the long run is to buy low and sell high. If the market is in the Excessive Greed category that would suggest that we are closer to a market top than a market bottom. Same analysis holds for the VIX.
2....the long run average discount for the Feds fund rate is about 2% and it currently sits at 5% with the prospect of two further hikes before year end to 5.5%. So the discount rate right now is well above the long run average. The long run market P/E ratio corresponding to this Fed fund rate is about 20. Right now the market P/E ratio is about 25. So unless the Fed funds rate rapidly declines to negative real interest rates (not likely since the Fed has signalled further rate increases before year end), the market P/E ratio is way too high.
3.....so could there be a new paradym? Not likely. If you look at the media, the focus was on worries about a recession and now the talk is that there won't be and so the talking heads are talking about growth not recession and people are breathing a sigh of relief and the FOMO effect is dominating (hence Excessive Greed). But what is the asset allocation of these talking heads? They are in Excessive Cash so as Indigenous people would say - "They are talking with a split tongue".
I could go on with other points but I am sure most of you get the picture.
The key question then to ask yourself before putting more money into the market is the following -
What is likely to happen in a positive sense that would drive asset prices higher?
If the answer is - "I can't think of anything". Then you shouldn't put more money into the market.
If you agree with what I said in Points 1-3 above then you should be taking money out of the market.