Stocks: A Tale of Two Prices

Stocks: A Tale of Two Prices

Recently the Dow Jones Industrial Average has made headlines as it crossed the 13,000 mark for the first time since 2008. It crossed 13,000 for the first time in April 2007 on its way up, again in January 2008 on its way down, touched above it in May 2008 (in a post Bear Stearns false optimism), and then began a precipitous fall and astounding (but typical) recovery.

To me, the more relevant dates to look at are when it crossed it for the first time in April 2007 and now again nearly five years later. Both were in the context of a bull market, hitting the watermark after several years of growth. However, what the big difference between the two is that in April 2007, investors as a whole were closer to Pollyanna feeling that nothing could go wrong. Now, they’re closer to Eeyore from Winnie the Pooh, meekly thanking the market for noticing him with some miniscule yield. John Q Public is not buying into this market like it was five years ago. Right now if you look at the S&P 500 on the whole, company profits are rising faster than the prices. This means that stocks are getting cheaper even if the prices are going up. We’re just about at the same price levels as in April 2011 just before Euro fears tanked the market. But the price per earnings ratio in April was 15.3 whereas now it’s 14. So even though investors are looking at the same price, they’re actually buying cheaper stocks.

The other irrational thing with the market is that we’re just coming off the best January performance in 15 years. One may guess that investors are pouring their money into stocks, but the truth is that trading volume is at its lowest volume since 1999. And despite how attractive stocks may be, investors are dumping money into bonds which on the whole are seeing their absolute lowest yields since we’ve been keeping track of them.

I’m fond of saying, “When has John Q Public ever been right about anything?” The herd instinct is usually wrong; at a minimum, the more time goes on the more it’s likely to be wrong. General “wisdom” is never that.

My observation is that the deadly mistake that investors are making right now is doing nothing. They are just “waiting and seeing” as they have been for the past three years as the market has doubled in price. It’s crucial that investors look at their long term goals and figure out what train best suits their objectives. Does it make sense to jump on a train (bonds) that is setting records for never being this expensive (as yields are setting record lows)? However silly it sounds, the statistics show that this is the train that the masses are piling onto. Or, does it make sense to jump on a train that keeps getting cheaper and cheaper that fewer people are piling onto?

Corporate profits have topped analysts’ estimates for 12 straight quarters. For this quarter the collective profit projection for this quarter is $104.27 which would be the highest level ever (again, for 12 straight quarters analysts have underestimated this number). This is a 69% increase since 2009. Just this morning the US revised its 4th Quarter 2011 estimates up. Speaking of which the US has never has GDP as high as we do now.

To me, this period of time is starting to feel more and more like 1973-1982. Back then, no matter how cheap stocks got, investors just weren’t buying them. But those who did see the opportunity and jumped onto the near empty train saw it leave the station with unprecedented velocity. The big difference is that back then bonds and CDs were paying attractive yields and now they’re not. But, the common denominator is that the masses were wrong, we just don’t know it yet this time around if I may be so bold.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing in securities, including stocks and bonds, is subject to market fluctuation and possible loss of principle. No strategy can assure success or protect against loss.