My thoughts on the stock market now
Hello Steemians! It is a down day for cryptocurrencies again and the market cap has fallen below $230 billion. On a day like this, let's not talk about crypto. Instead, let's take a look at the stock market. I will like to focus on the US stock market in particular and offer some of my thoughts on where we might be heading.
First, take a look at the S&P 500 chart below. I am not a TA expert, but it seems that the run up since April has formed a strong upward trend and we are once again near the all-time high (ATH) of 2872 level. In fact we are just 1% away from the ATH.
While the stock market continues it decade long bull run, allow me to point out a few observations that you should take note of before you FOMO into the stock market 😎.
US-China Trade War
The trade war between US and China started in Jan 2018, when US President Trump imposed tariffs on imported solar panels and washing machines. Fear of the trade war escalating sparked the correction of US stock market in Jan 2018. It was then followed by a period of volatility.
The war really started to escalate in April 2018 when China retaliate with similar tariffs on US products. The tit-for-tat move continued even till today, with China imposing a tariff on 279 products, including motorcycles, steam turbines and railway cars. This site contains comprehensive information on the trade war so far.
With new tariffs being announced almost on a weekly basis, the market shrugged off the concerns and bounced back strongly in the past 4 months. Take a few seconds to think about it. Does it make sense? My view on this is that the impact of the trade war has not been reflected in the earnings results for the past quarter yet. Hence, most companies are still announcing good earnings and the market cheers on. In my opinion, the real impact will be felt in the next 2 quarters of earnings.
High valuation in several measures
I like to see things from a macro level and one of my favorite indicators is the Shiller PE ratio, or the cyclically adjusted price-to-earnings (CAPE) ratio. The current Shiller PE of S&P 500 is 32 which is almost double of the mean. So what does that represent? Like most things, the Shiller PE will tend to revert to equilibrium. Over time, it is likely that it will revert to its mean.
The above table assumes that Shiller PE tends to revert to mean every 8 years. Based on the current Shiller PE, you can expect to lose 3% annually if it reverse exactly to the mean. If we are fortunate and the bull run manage to extend a bit further, we might end up at 1.5x of the mean instead. However, even so, we will only make 1.7% annual returns. Weighing the risk and reward, I think the choice is clear.
Another measure which I like to use is the Buffett indicator. How does it work? Warren Buffett compares the the percentage of the total market cap (TMC) of equities relative to the US GNP and get a ratio. He said that this is “probably the best single measure of where valuations stand at any given moment.” With the ratio, we will be able to have gauge as to how high/low the market valuation is based on the table below:
Where do we stand now? Below is quoted from GuruFocus
As of today, the Total Market Index is at $ 29688.4 billion, which is about 145.5% of the last reported GDP. The US stock market is positioned for an average annualized return of -2.3%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 1.71%.
This also leads me to the next point and let me lead you to it with a simple thought process. We all know that treasury bonds are considered as risk free assets. We also know that equities/stocks are considerably riskier compared to bonds. If I were to tell you that the 10-year treasury bonds are yielding close to 3% returns and the stocks dividends are only at average of 1.71%, which one should you choose to invest in? It should be quite clear.
Conclusion
Not too long ago, Facebook stock price plummeted 20% and wiped out $145 billion of market cap. This is equivalent to BTC and ETH both goes to zero based on today's price. Can you imagine that? Such price movements happen when market expectations are too high and the results fail to meet the expectations.
The market is volatile and unpredictable. I can never be sure how far this stock bull can run. But judging from various macro factors, I think the stock market is highly overvalued. There might still be some short-term profits to gain if the market really manage to break through ATH, but I think we should all be thinking for the long-term.
I am ending this article with an overused quote, which I find very relevant:
"Be fearful when others are greedy and greedy only when others are fearful"
Warren Buffett
If I have $10,000 now and I am ask to make a choice between buying into cryptocurrencies or stocks, I think the choice is obvious. Thanks for reading and as usual let me know your thoughts!
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I will choose to invest in steem rather than stock market indeed. The market is going down but hopefully when it can go up with year-end bonus of many people like us coming. With the spare cash, many may just invest in crypto since it is low now resulting in the overall price rising. The main problem in my Dust Upvote Initiative is my delegating steem power has increased but the falling of steem price has made my upvoting value stagnant. Hopefully we can see great rising steem price in this August.
Thanks for your initiative. I think in this difficult period, we need more people like you who are willing to contribute to the community.
To be honest, I am a bit shocked by this sudden dip in crypto prices. I thought we have just corrected recently and didn't expect another crash to come so fast.
Anyway, thanks for reading!
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Sounds like I need to wait and buy solid companies after the trade war crushes their earnings and hold until the Koch brothers impeach Trump for messing with their profits.
That will be my strategy as well :) For now, I plan to either hold cash or invest more into crypto.
September is always the worst month for the stockmarket. There is a saying sell in may and go away but it's a myth, in reality you should sell before september. With this tradewar we can go down 10% in the spy before we continue this bullrun.
I heard of "sell in may and go away" but I didn't know that September is a bad month. We shall see.
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