Stocks are overvalued. It’s that simple. With a global economy going into recession, there will be pain in global equities.
As money gets tighter with the Fed raising rates, US companies, which just began reporting Q4 results, will not be able to borrow to buyback shares to make their quarterly returns look better on the bottom line.
There’s been a slowing of growth on the top line as revenue is much harder to come by, despite setting a low bar through earnings warnings during the quarter.
Will these large US firms beg and plead with the Fed to lower rates again, of course they will. Silicon Valley CFOs are probably banging on the San Francisco Fed’s door telling them the situation is dire and that they need help. Some are complaining that what the strong dollar is doing to China is crippling their ability to get gadgets at a good cost.
So the Dow goes down 540+ points during the session on the weaker earnings and reduced P/E ratio, Main Street doesn’t care. They are focused on the 20% lost out of the 401(k) in the last 6 months.
Investors have been here before, and survived the 50% decline in their portfolio between late 2007 and spring of 2009. Now they’re older and have less time to recoup those losses, so they are going to cash in their funds to preserve what they have.
Financial advisers, who are just glorified salespeople, will say history shows that it’s the wrong move to sell. But this is not a normal market by any stretch of the imagination. And don’t forget they are salespeople with a vested interest in the amount of money you have in play. Even if it goes down they make more with your cash in the market regardless of your negative returns.
Markets always bounce back and they probably will. But not until the Fed does something. This market will not rely on organic growth to move higher. It’s not there and it’s no coming anytime soon with the global slowdown.
So the Fed will have to become “more accommodative,” which means lowering rates and more QE. This will happen before the end of this year, but with it being an election year the timing is the question.
Look by the end of March, we will probably be in a recession, with 2 negative GDP quarters. The estimates for Q4 are now down to 0.6% at the Atlanta Fed’s GDPNow site, based on weaker holiday retail numbers. Wait until the Bureau of Economic Advisers get manufacturing numbers on their second revision at the end of February.
As I have said earlier, I am not a financial adviser, but I can tell you I have been out of equities since July of last year. So I may have missed a week or two on the upside, but I avoided the August swoon and this year’s carnage.
You can move 401(k) money into a savings component in your plan without incurring any penalties, and then reallocate it when you think the market has bottomed. Don’t need to be an expert and you don’t have to be early. You can wait for your own “green shoots” in the Spring or early summer. I certainly will be looking for an upside and will alert my readers when I see it.
But for now, there will be pain in the equity markets.