Where is the Stock Market Going from Here?

January 19, 2018

So, 2018 is here and running.  The market has already surpassed the 25,000 mark (early in 2018) and who knows where the top will be?  The bandwagon is filling up, the train is leaving the station and the ship is setting sail.  It’s time to load up on Bitcoin and throw caution to the wind.  I mean, do you wanna make money or not?  Well, wait just a minute there.  Is the market too high right now or does it have lots of room to run?  In my studies, there doesn’t seem to be very much agreement on the previous question.  In looking at our research, the market seems to be pretty high.  We get a weekly stat called the CAPE (cyclically adjusted price to earnings ratio).  This stat considers the price to earnings ratio over the last rolling ten year period.  It is meant to keep a single event like a one-time profit from skewing the overall P/E Ratio of that company or group of companies.  While the historical mean of the CAPE is just over 16 (meaning it cost $16 to buy $1 of earnings from that company), the current price is over 33 times earnings, making the stock market twice as expensive as the historical average.  However, Brian Westbury, of First Trust Advisors, says that the S&P 500 is still massively undervalued.  He comes to this conclusion by using the Capitalized Profits Model (I’d love to explain this to you, but I’d never heard of this model until now), not the P/E Ratio.  His prediction for 2018 is a GDP growth rate of 3%, Inflation to run at 2.5%, unemployment to fall to 3.7% and 10 year Treasuries to finish the year at 3%.  He also says that, because of the numbers we just recited, the S&P 500 should rise to 3100, and the Dow to finish at 28,500.  That is a very bullish set of predictions.  

Harry Dent, the best-selling author of several books about investing, says we are likely to have a massive stock market crash in the next three years, devastating the portfolios of anyone who stays in the stock market.  He also thinks the high point of the market will be later this year.  Both Dent and Westbury have been right enough that you must take their predictions seriously. These are both very smart guys who are interpreting the data they have using both their brains and biases.  If we believe one, we will probably be in cash all year.  If we believe the other, we will load up on growth stocks and stick with them all year, no matter what.   Since nobody really knows which way the market will go in 2018, or where it will be at the end of the year, we will continue to follow our research, making changes to our Dynamically Risk-Managed portfolios when we get the signals.  We believe our clients should do well no matter what the stock market does because we are keeping a constant eye on their portfolios and making changes when the research calls for it.  
            
 

 

 

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