Do you know who said this? It was the famous economist, John Maynard Keynes. Possibly one of the wisest statements I have heard in the field of investing, ever. This week, Deutsche bank released their findings from a recent survey that polled 550 market professionals. Almost 60% of them are expecting a stock market correction of between 5 to 10% by the year-end. That would see the Dow drop 3500 points in the extreme case. Everywhere I turn, I hear the talk of the ‘tops in the market. Over bought. The RSI, which is supposed to measure when markets are overbought or over sold is going crazy . Only 10% of those polled expected a stock market rise exceeding 10%. Both these outcomes are very possible, but I love seeing these polls that are against my overall portfolio bias. More often than not, these polls are reverse indicators. Back in the day, the Economist news magazine was a classic reverse indicator tool for me. If a news story, talking about a potential bias in the markets made it to the front page, by the time it got there it was old news and time to do the reverse.
So they are a whole bunch of traders out there now trying to pick the tops of the stock market. After all, this current valuation does seem ‘irrational’. But take a look at the chart below, every pullback we have seen this year, which could have been that 10% reversal, has seen a higher high, only a short time later. I am not saying this market will go on forever, however, I would be very cautious about trying to pick tops.
The US inflation numbers today, show that perhaps the Fed has got this inflation narrative right. That the recent surge in prices is only “transitory”. The markets are becoming saturated with the taper talk. "When will the Fed cut back on its assets purchase programme?" Well of course they will do in time and perhaps it will be by year-end. But surely this is priced into the markets already and any pullback will be seen as transitory!
So for me, I am with John on this one. Happy to buy the dips and enjoy the ride higher and remain solvent in the meantime.
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