Record highs are no longer justified
|“Since Election Day on 8 November, the stock market is up more than 25%, unemployment is at a
17-year low andcompanies are coming back to the U.S.”Donald Trump
Indeed, the Dow Jones Industrial Average and the S&P 500 rose by more than 25% and 20%, respectively, since 8 November. President Trump gives credit to himself and no one can blame him, because fundamental data cannot justify current levels.
All three major U.S. indices reached new record highs yesterday, but investors have got used to this, and record highs are no longer making headlines. For those who have been waiting for a correction to buy the dips, they have missed the opportunity. The threat of nuclear war, expectations of higher interest rates, hurricanes and terrorist attacks all failed to pull markets from record levels.
Equity strategists have been forced to adjust their year-end target higher for U.S. indices, although little justification is provided. Valuations are becoming incredibly overstretched, yet investors do not seem to worry.
Forward 12-month P/E ratio on the S&P 500 rose above 18 this week, for the first time since mid-2002. Although multiples remain below the forward peak P/E ratio of 24.4 tested during the dot.com bubble, it’s still much higher than 10-year or 20-year averages of 14.1 and 16. This means investors are paying more, for less.
It looks to melike speculation and greed are driving the current bull market, which could be an indication of the latest stages of an uptrending market. However, it is not a wise decision to sell uptrend markets; speculation might continue to drive stocks higher, especially if earnings surprise to the upside.
Nobody knows when or what will trigger a sharp correction or a bear market. Timing the market is an almost impossible mission. However, for investors who would like to remain invested in the current bull market, it would be a good idea to buy protection. CBOE’s Volatility Index (VIX) is currently trading below 10 (-29.5% YTD), which means options prices are relatively cheap. The downside to buying a put option is that it expires and the investor loses the premium paid;but, given that things look a little crazy, the reward of buying put options is higher than the risk involved.
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