Post by
Experienced on Dec 22, 2023 10:18am
Sooooo...Where is the Market Right Now
While I have posted many times that what people do in terms of their investments depends very much on one's investment objectives and tolerance to risk. I have also talked about asset allocation and the need to change/ adjust one's asset allocation over the business cycle. Many empirical studies over the years have identified asset allocation as a key determinant of long term returns in the stock market.
With that as backgound, where is the market right now and is it vulnerable to for a decline in asset values (irrespective of whether there will be a recession next year or not)?
Two indicators I use for shorter term decisions on asset allocation and more specifically the cash component are - market sentiment and the market P/E ratio relative to interests rates.
Right now both of these indicators are flashing red.
Market sentiment is in the Greed category and approaching Excessive Greed. Historically this means that the market is as approaching a shorter term top and the indexes will fall. When this actually happens is not precise as the market could stay in this category for a 2-3 weeks but it is a clear sign to be careful and prepare for a market downturn. When I see this I start to raise my cash levels so I can buy some things on sale later. Do I seel everything?...nope..just a tweak of 5-10% in my cash balances.
In terms of interest rates, there is a longstanding relationship between the overal market P/E ratio and interest rates. Obviously, if interest rates are higher then some market participants will, based on risk tolerances. sell equities and buy fixed income. Right now in the US the S&P 500 P/E ratio is about 27. Long run empirical regression analysis would suggest that the P/E ratio should be around 21. In relative terms this is pretty significant differences and for sure indicated market vulnerbility.
More imprtantly, there is a concordance between the two indicators or in simple terms they are both predicting the same thing.
Up to you whether you take this heart or think it is just nonesense.
Comment by
555rookie555 on Dec 22, 2023 11:15am
I appreciate the big picture indicators and investment strategies you share experienced. The P/E ratios of some sectors (like oil and gas) seem quite reasonable compared to others (like tech companies). Any comment on how you identify market capitulation and whetger you expect all sectors to equally "go on sale"?
Comment by
Kman86 on Dec 22, 2023 2:54pm
Experienced....with all due respect, even a broken clock is right twice a day. You've been saying "storm clouds" have been gathering for the past two years. I'd like to think that most people here are educated enough to be making their own investment decisions without the monthly grandstanding.
Comment by
Experienced on Dec 22, 2023 3:42pm
kman...fair enough... One point of clarification though. The post you are referring to isn't talking about my views regarding a recession but rather a very short term situation about current market valuation based on current market sentiment and valuations. But sure...if you and everyone else here knows all that my apologies for wasting your time...
Comment by
mrbb on Dec 22, 2023 6:39pm
bond ouchy in 2023 TLT Stock Price | iShares 20+ Year Treasury Bond ETF - Investing.com
Comment by
Torontojay on Dec 23, 2023 6:05am
Tlt's are up almost 10% in the last month. When the 10 year treasury reached close to 5% at the end of October, then anyone who purchased Tlt's in that time frame is doing well and has outperformed the S&P 500.