Expect More Damage Ahead For US Stock Prices
Even after last week’s dive, Robert Shiller’s CAPE (cyclically-adjusted P/E Ratio) for the S&P 500 index, which accounts for 10 yrs of earnings, still stands at 24.9. That is not far from its recent high, which trailed only the pre-crash periods of Y’s 1929, 2000 and 2007.
This is a very risky time for the US stock market, the valuations are still very high in here.
The CAPE ratio has averaged 16.6 since Y 1881, and a return to that level would put the S&P 500 at about 1,250. That would represent a 35% fall from 1,921 Friday’s close.
The benchmark index hit a record high of 2,134.72 o 20 May and touched 1,867.01 on 24 August.
To be sure, there have been sustained periods when the CAPE ratio stayed above historical norms, Prof. Shiller says. “Nobody can really forecast the market accurately. But I think this is a risky time.” He has reduced his own stock weighting.
But investors have different goals and risk tolerance levels. “People need to look at their own risk situation,” Prof. Shiller said.
What I have learned in the past several weeks is that lot of people are not prepared when a correction happens in the stock market.
Many people are charmed into a Bull market and unprepared when things turn South. They assume that a correction means that something is wrong and that stocks should not be touched, that they should ride it out.
That is a big mistake. Corrections happen all of the time after big runs, and they are to be anticipated, but you cannot write off the market when they happen.
Having cash on hand when the market corrects is the Key to protecting your portfolio. Because sometimes the market will stink and there is nothing to do but just sit in cash.
Cash is the perfect hedge at a time when the market hits dangerous highs and may very well protect from huge losses.
Cash may well be most underrated investment of all. Savvy players, when they see the stock indexes spike, take money off of the table to build up a supply of cash.
The adage is, “sells on strength and buy on weakness.”
In this toppy time the fear is that investors sell their best stocks, and hold on to their worst stocks because the higher-quality stocks stopped going up, that is a big mistake.
Participants must be aware that there are many circumstances that cause the stock market to dive. Get ready for more Southside action, it will happen again, even after the fall Friday.
Having cash could mean the difference between good and bad stocks in your portfolio. And keeping a solid portfolio that will ensure that it will be able to bounce back from a correction, read: have cash to subsidize, instead of selling high-quality stocks, do that and you will outperform.
Have a terrific weekend.
HeffX-LTN
Paul Ebeling
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