Lately, it doesn’t seem to take much to provide investors with reason to buy and continue to push the stock market upwards. Each day some sort of data or report is presented, and the financial media and stock market cheerleaders seem to find a way to put a positive spin on it. Even when a threat as serious as the Coronavirus pandemic emerges, somehow the markets seem to be able to shrug off the bad news and keep chugging away.
Optimism seems to be at an all-time high, but then again, P/E ratios are also very elevated.
For those of us on the more conservative side of how we manage our retirement savings, it can be natural to second guess our strategies as we watch the stock market continue to rise, even though the fundamentals don’t warrant such a ride up.
It’s no secret the that the Fed has shown its willingness to do what it can to support the stock market with its cheap money policies. Whether we call it Quantitative Easing or Overnight Repos, the result is the same.
We’ve seen it before…the Fed acting in a manner that makes equity markets seem more attractive than the more conservative options. As a result, many just keep pumping money into a seemingly invincible market.
During times when confidence and optimism are near all-time highs, it can be easy to get caught up in the excitement and feel like we are missing out. If you are dealing with these types of feelings, I think now is a good time to take a step back to regain some perspective.
Although today’s stock market might be great for traders with short-term outlooks, when it comes to planning and saving for retirement, a long-term outlook is the key to success. So, what’s the outlook for the next few years?
Well, the IMF recently forecast a slowdown in Gross Domestic Product for the US, China, and Japan in 2020 and 2021—a bleak global outlook, due to an expected sharp slowdown in India where problems in the financial sector have stifled lending and consumer spending.1
Another point to consider is how Warren Buffett has said that the single best measure of the stock market at any given time is Total Market Capitalization (TMC) versus GDP.
The “Buffett Indicator”, as it’s known, states that if TMC is less than or equal to 75%, the stock market is undervalued; if it’s between 75 and 90%, it represents a fair value; if it’s above 90% it’s overvalued—and if it surpasses 140%, it’s considered an “extreme danger”.2
As of February 4, 2020 it stood at 152%3—higher than its peak in 2000, ahead of the dot-com crash.2
Although the market could have another ‘up’ year in 2020, now does not seem like a sensible time for anyone who is retired or close to retirement age to lose their focus as a result of their fear of missing out. Instead, now is the time to be extra careful to avoid making any mistakes that could negatively impact your quality of life during retirement.
1. IMF’s global economic forecast is slightly less optimistic
2. Dow Futures Slide as ‘Buffett Indicator’ Hits Dot-Com Bubble Heights
3. Buffett Indicator: Where Are We with Market Valuations?