PAY ATTENTION TO THE S&P AND LISTEN TO DOUGLAS ADAMS AND DON’T PANIC

PAY ATTENTION TO THE S&P AND LISTEN TO DOUGLAS ADAMS AND DON’T PANIC

Matt HealeyFriday,8 March 2013

The Snap:

On Tuesday the Dow hit an all time high. It passed the closing highs of 14,165 and closed at 14,254. This was a big deal for networks like CNBC and Bloomberg. Since I pay attention to these networks I thought I should comment. Fortunately I have a blog where I can do that.

The Download:

New all time highs are a big deal. They are also inevitable since we abandoned the Bretton Woods currency agreement, also know as the gold standard, in 1971. This has resulted in currency inflation which will inevitably lead to new highs on the major indexes. So a new high is expected. However new highs in the Dow are less important than new highs on the S&P 500. The reason for this is that the Dow is a collection of 30 large companies, the S&P 500 is, well, 500 companies so it gives a better gauge on the overall economy. As of the writing of this post (Wed before the open) the S&P was within a few percentage points of an all time high.

So this brings up a question. Now that we have hit an all time high is it time to get out of the market? After all, we have hit an all time high so stocks must be getting close to a top and since no one wants to get crushed, clearly selling now should be a good idea. This is a very shallow analysis. We may go up from here we may go down. Personally, I think we go higher from here. Regardless, the reason not to reflex sell when we hit a new high is the P/E ratio for the S&P. In an ideal world stock prices will be based on corporate earnings and forecast growth in earnings. On October 1st 2007, when the S&P hit its all time high the trailing P/E ratio was 20.68. On March 5th, the day the Dow hit it’s all time high, it was 17.51. So, currently stocks are cheaper than they were in 2007, the last time we hit an all time high. Personally, I think this market has some room to run and we will see higher levels over the remainder of the year. It will not be a straight line up and we will have pullbacks, but I suspect that the markets are going higher.

Hat Tips:

Bretton Woods, S&P P/E Ratio, Image Credit: Wikimedia Commons




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