Wednesday, June 20th, 2018

Should You Be Nervous about the Stock Market?

 

The stock market just keeps going up despite seeming overpriced. Should you be nervous about the stock market? CNBC writes that they are getting nervous about the rally.

The S&P 500 just posted its longest weekly winning streak since 2013, and we can count the number of things going right.  But there is a problem lurking under the surface: The rally in recent weeks has become much narrower. As strong as the technology-laden Nasdaq has proved, only 53 percent of its names are trading above their 200-day moving averages. The percentage of New York Stock Exchange-traded stocks above their 200-day moving averages has also rolled over since the beginning of the month.

An indicator causing concern is a deterioration of the market advance to decline line. And now the end of the year is rolling around and large funds are likely to move money, take profits and otherwise roil the markets. So, should you be nervous about the stock market?

A Sea Change in Demographics

Our sister site, Profitable Trading Tips, just commented on what happens to bonds when people stop saving and sees a sea change in investing and saving as a generation moves into retirement.

There has been a demographic phenomenon as large numbers of people in developed economies pass through their 40s and 50s. These people are great savers and their savings have driven down bond interest rates. The demographic phenomenon is about to stop as these people move into their late 50s and early 60s. They will save less and reduce their spending as they move into retirement.

What this implies is that people who have been investing and saving like mad are going into retirement. They will quit buying stocks and bonds and start cashing out. They will move into safer positions and their actions will likely case a crash of the bond market and a major correction in stocks.

In fact ex Fed chairman Alan Greenspan has predicted that around 2020 inflation will take hold driving interest rates up and the value of current bonds down. Likewise equities will devalue along with currencies.

Anyone who has made money as the market has recovered from the 2008 crash is hoping for more but certainly wary of another correction or crash. This fact is important to bear in mind because if the market starts a major correction it could exacerbated by everyone with bad memories of the last crash trying to get out at the same time. In answer to this scenario our sister site, Profitable Investing Tips looked at safe investment options today.

Assuming that earnings drive the value of investments what are some safe investment options today? Take a look at our article about how to invest $10,000. Please note that we suggest that you first pay off credit card debt and put enough money to pay the bills for several months in the bank. Then considering buying your own home and taking advantage of the deduction on mortgage interest payments. And finally use IRAs and 401Ks to take advantage of tax deferred savings vehicles.

Investing in companies with cash is always a means of obtaining a margin of safety in a stock portfolio. A company like Microsoft has gone through its incredible growth phase and is sort of hung up the high twenties. However, it pays about a 2.5% dividend and typically has billions of dollars in cash at its disposal. This cash reserve allows a company to weather economic storms without going into bankruptcy and allows it to take advantage of potentially profitable takeover opportunities.

Since they wrote about companies with cash and used Microsoft as an example the company has quadrupled its stock price. Its P/E ratio is high at 28 but nowhere near those of Amazon at 283 or Netflix at 198. On the other hand Apple has a P/E ratio of 18! If you are nervous about the market today look for companies with cash, a solid position in their market sector and ones that are not ridiculously overpriced.

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