Sunday, December 16th, 2018

Is It Time to Get Out of the Stock Market?

 

We read in the news that Warren Buffett is having trouble picking stocks that fit his investing strategy and is holding on to nearly $100 billion in cash. If the most famous investor in the world is having trouble picking stocks how can you be successful? The so-called Oracle of Omaha admits that he blew it in not investing in Amazon.com but still won’t put money into the FANG darling because of its 250 P/E ratio. Profitable Investing Tips just published an article, Beware of Investing When Illusion Replaces Reality.

The stock market just keeps going higher. The voices of contrarians are being drowned by a chorus of analysts predicting endless growth. Does this sound familiar? If you were paying attention in the late 1990s you heard about how the stock market was now different and that old rules did not apply. Of course then the dot com bubble led to the dot com crash and a lot of money was lost. You would need be more than 100 years old to have been an investor when the market crashed in 1929 but there was the same unbridled optimism running up to the crash that ushered in the Great Depression.

The basics of stock value do not change. In the short term a rising market will support lower P/E ratios due the expectation of growth. But growth never lasts forever and at some point those with profits will sell. Because the market is often a matter of follow the leader successive investors take profits as they begin to doubt the likelihood of continued growth. Just as the prophecy of unending growth begets a rising market the prophecy of lower growth compounded by big position sellers causes the market to correct or even crash. Beware of investing when illusion replaces reality.

Before the follow the leader market starts to correct and then turns correction into a rout it may be time to get out of the market or at least take a little profit from the recent winners and look to diversify a bit. If the market is going to go south and do so badly what will be the trigger?

North Korea, Venezuela, Russian Investigation or One Tweet Too Many

An interesting thing is happening with the US dollar. As Forex Conspiracy Report writes traders are standing in line to short the dollar and the primary reason is international concern about the ability of Trump and the Republican to execute fiscal and monetary policy.

So long as Trump is in the White House and engenders dysfunction in the government there will be concerns about the ability of the USA to govern itself and maintain sound fiscal and monetary policies. Despite those who believe that the Russian mess will take Trump out of the White House that is unlikely. The more likely situation will be continued dysfunctional tweets and increasing distance between Trump and congress making the task of governing ever more difficult. Thus standing in line to short the dollar may become an ongoing task.

What concerns us is the weakness of US governance and more so the perceived weakness. It may only take a minor change in North Korea or Venezuela plus a threatening tweet from an embattled president to spook the markets and then all bets would be off. Maybe the best idea is to buy puts on everything in your portfolio.

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