Well, the stock market continues to be driven up, especially the S&P500, with the tech stocks leading the way, The other 495 stocks of the index are doing OK, but the five Tech Stocks have really driven up the price. Should we be worried.
I turned back to the Ben Stein book that I’ve written about before – “Yes you can Time the Market.” Its pretty much the trends on stock price, P/E ratio, and bond yields. I used it to determine how well I would have done if I followed it since I graduated (Roughly 8% – 11% better than straight dollar cost averaging over last 35 years), at the end of 2019 (where it predicted a drop) and in mid-March 2020 (where it predicted you should jump back in). The overall lesson is that, if you have a long-term outlook, you can do a little better than just following the market.
So how are we looking right now, in terms of the trend lines and ratios spelled out in the book?
Well, the concept is there are four (4) areas where you can follow the trend and determine if you should be purchasing stocks, or purchasing bonds.
- Price of S&P500 vs. 15-year average: July 14, 2021 = 4,380 vs.15-year average of 2,328. Signal says stocks are overpriced, do not buy more
- S&P500 P/E ratio vs. 15-year average: July 14, 2021 = 46.55 vs. 15-year average of 26.9. Signal says stocks are overpriced, do not buy more
- S&P 500 Dividend yield vs. 15-year average: Jul 14, 2021 = 1.32% vs. 15-year average of 2.00%. Signal says stocks are overpriced, do not buy more
- Earnings vs. AAA corporate Bonds. Jul 12, 2021 = 2.15% (1 / PE ratio of 37.74) vs. AAA bond yield of 2.64% (very low yield). For the first time since Jan 2010 (remember the 2008-2009 explosion), this signal is saying stocks are overpriced.
So all 4 of the 4 signals say stocks are overpriced! Note that the concept does not suggest you should sell all your stocks, or sell all your bonds. What it is saying is that in the current environment, the stocks (or bonds) are too high priced, and you should focus your purchases on another asset class. Relook at it later on, and potentially change your purchases with the new data (I look at it once/year).
My personal belief is that we’re long overdue for at 20%+ drop in stocks. Since most of my investments are automatic with the 401K, I will probably just leave them as is (see current allocation) but I am preparing myself psychologically for a large stock market drop. I guess we will see….
How are you guys doing with the run up?
Mr. 39 Months