Posted by kdadmin on December 3rd, 2015.
If you’re in an airplane, and the wing stalls, you fall out of the sky and crash.
If you’re in the stock market (S&P 500) and a driving force (QE) that has been pushing it up to new highs stops, it’s likely that the stock market will likely crash.
Four and a half months ago (noted at the black arrow), I wrote an article introducing this connection and how wreckage lay ahead. You can find that article here.
Look at the red line above. That’s the Federal Reserve’s rate of buying long term bonds in the market. This is how they stimulated the market. It’s like throwing gas on a fire. Do you notice any correlation between it and the S&P 500 (SPY), or, the Price to Earnings Ratio? They’re all going down. In sync. Now, if the Federal Reserve has told you the red line will continue to drop (because they will raise rates, and have already suspended their bond buying program), what do you think will happen to the S&P 500?
It gets worse …
Remember how I talked about the difference between an amateur and a professional perspective in my last post? Have a look at thechart below for perspective. It goes back ten years. Notice anything disturbing?
How about that the Price to Earnings Ratio (the price of a stock divided by how much it earns per share), is at the same level that it was BEFORE the Great Recession of 2008? AND, that the S&P 500 (SPY) is nearly DOUBLE that previous price level?
Let’s go even further. Back to 1981. Notice anything worse? Well, you’ll see the Dot.com rise and crash of the late 1990’s, but you’ll also see that before the last two major declines, the S&P 500 (SPY) topped out at just over half of its current valuation, and AT its current Price to Earnings Ratio.
Also, notice how the S&P 500’s spike follows the Federal Reserve’s stimulus?
What can you conclude? Given what you see, and the fact that now that the Federal Reserve has stopped stimulating the economy, is this really a time that you want to “buy and hold” your stock positions?
Let’s say a person holds a stock like Amazon (up 100% in the last year), with a Price to Earnings Ratio of 969. That’s 37 TIMES the Price to Earnings Ratio of the S&P 500 (SPY). Let’s say they’ve made some decent money. Given what you can see in the economy above, is now really a time you’d think they should play chicken with the global market forces? Or, maybe, sell, take the profit, and live to gloat another day? Dunno, just a thought … Professional rationality and all. (Note: I am NOT giving investment advice here, merely using Amazon as an example. Everyone’s situation is different.)
While the number one question I get from people about finances is, “What’s Happening With the Stock Market?” It’s not the real question. People really want to know what it means to them. In this case there are two answers.
IF you have your money in certain bonds and cash, the answer is, “Not much.” You’re likely out of the way of most of the potential wreckage, assuming you have the right bonds and are properly insured on the cash portion of your accounts, should you need that.
IF you have a lot of money in stocks, you have to ask yourself, “Do you feel lucky, punk? Well? Do ya?”