Well, that didn’t take long at all. After a pretty robust January for stocks, about 5% for the SP500, it was just a matter of time before the gloom and doomers found a new reason to squeal ‘the sky is about to fall’…… again. Amazing when just a simple focus on what really matters makes a great deal of their arguments irrelevant as several bloggers have already pointed out (see here and here )
The argument is the market is approaching all time highs where it will rollover and crash. As an example, you have the triple top argument or the perma bear argument of the FED causing the world to implode. Here is a chart of the triple top argument.
Freaked out yet? You shouldn’t be. This is such a weak argument. First, shouldn’t we look at other indices to see if there is a similar scenario a foot. Eddy at Crossing Wall Street brought this up a a few days ago. Here is his chart of the Wilshire 5000, a representation of the total US stock market.
So, the broadest measure of US stocks is at an all time high already. That’s one nail in the coffin. Now, maybe the most egregious mistakes these kinds of analyses make, the focus only on the price level. They ignore dividends. Yes, you read that right. The component of stock returns that has historically made up at least 40% of total returns is ignored in this kind of short term thinking. Eddy mentions in his post on the Wilshire 5000 that it would be 11% higher than its previous peak including dividends. And how about that scary SPY chart? Below is a chart of the total return and price of the SPY that Mebane at World Beta posted.
Well, isn’t that something. The SP500 is at an all time high already. Final nail in the coffin. Now, go back and re-read the gloom and doon arguments. How do they sound now that you know that the US stock market is already at an all time high?
This doesn’t mean that there aren’t legitimate and well reasoned arguments for the stock market being over extended, over valued, due for a correction, etc… but at the minimum you need to frame the issues correctly if you have any chance of taking advantage of the situation. Better yet, ignore the gloom and doomers and by the way, ignore the Perma Bulls just as well. Both sides are usually pushing an agenda.