You have watched the market fall and rebound in the last few weeks. Is it a fool’s rally? In The Wall Street Journal, James Mackintosh suggests market valuations signal caution. He writes:
The pushback I most often receive from readers is that true investors should ignore the day-to-day swings in the markets that obsess traders and just buy and hold stocks. There’s a kernel of truth in this: Most fund managers underperform, so what chance do individuals dabbling in the markets have? Better to buy the index.
However, even the longest-term thinkers should adjust their portfolios when prices are way out of line with reality (the dot-com bubble or the Covid bust, bonds at close to zero yield, the SPAC/cannabis/clean energy bubble of late 2020-21). The question is how to judge.
I’ll consider three gauges here, the CAPE, the forward PE and the Fed Model. All show that the offers being presented by Mr. Market—as legendary investor Benjamin Graham personified it—are unattractive for large U.S. stocks at present. They are expensive not only compared with the past but compared with smaller stocks, foreign stocks, corporate bonds and Treasurys, too.
If these measures are right, the rebound of the past couple of weeks is a fools’ rally, and it’s time to switch away from the biggest stocks.
Action Line: When markets are like this, it’s not necessarily what you invest in but how you invest. There are plenty of opportunities to get your portfolio mix in line with your retirement life. When you want help, I’m here. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
E.J. Smith - Your Survival Guy
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