If you look at the S&P over the last 5 years you can see that prices have not moved at all. We’re at the same place we were five years ago. Why is this? Well, to me, it seems that P/E ratios have declined, while the prices have stayed the same. With interest rates being low, you’d think there’d be growth in the market, but this has not happened. Earnings have been increasing in this period, so the cause of this 5 year flatness would seem to be lack of confidence in the stock market which has been pushing down the P part of the P/E ratio.
There are two ways to look at this (positively and negatively):
1. It’s still a good time to invest in the stock market because this lack of confidence has pushed the prices of stock to levels where they are a good buy.
2. It’s not a good time to invest in the market when the market has not picked up steam with low rates and increasing earnings, as well as reasonable market prices. You have to wonder, if this is the best the market can do with all these factors that should be helping the market, and all it can do is stay flat, what will happen if rates are higher (both tightening all the free money floating around, and tempting people to pull money from the market and place it in bonds) and or earnings fall from many of the factors discussed on this site?
Personally, I have a very high percentage of my savings in stock. I weathered the dot.com bust with nary a scratch, but the possibility of a recession has me worried.
By following the advice of Benjamin Graham, I shouldn’t try to time the market at all, and just continue to invest on a regular basis (of course keeping enough cash on hand for emergencies). The only other option should I choose to muck with my investment allocation, is to place a percentage of my investments into bonds if I don’t like current market situation. With the relatively high rates out now, and the possibility of even higher rates, I’ve been toying with moving up to 50% into bonds (basically taking that off the table)
The question then is what to do with the other 50% that’s still in stock. Should it be put into commodity stock like oil stock, or gold funds, “recession proof” stocks like RCII, or should I just go along business as usual and pretend there won’t be a recession since placing 50% into bonds to hedge against a recession and or market collapse?
