There is one key characteristic to look for amid a plethora of signs that once-exuberant investors are now starting to second-guess the bull market unleashed after Donald Trump’s presidential victory.
“In confusing times, there is one guide that all sensible investors should rely on: value,” the Financial Times recently reported.
“Or in other words, the price they pay versus the value they receive,” the FT explained.
Investors are currently paying more than $18 per every $1 in expected earnings on the S&P 500 over the next 12 months, near the most expensive since 2004, according to Thomson Reuters Datastream data.
“Anyone buying shares today should pay less attention to politics and ask themselves one question: if the price of the stock you purchase halves tomorrow, is it still so good or cheap you would buy more? If the answer is no then maybe you should not be buying at all,” the FT explained.
A recent Bank of America Merrill Lynch survey of large fund managers says stocks were the most overvalued since the dotcom bubble, the FT reported.
And one of the most respected economic gurus of our time has recently been sounding the alarm about pricey stock valuations.
Byron Wien, veteran investor and vice chairman of Blackstone Advisory Partners, told Reuters the market was "overbought and valuations are extended so it can correct" but stressed he predicted "a correction, not a bear market."
Traditionally, a correction is defined as a 10 percent drop from a recent high. A decrease of 20 percent or more is considered a bear market.
Wien cautioned of the risk of boosting growth by fiscal stimulus and said "growth is limited by population expansion and productivity." He said productivity hasn't improved this millennium because there hasn't been a major breakthrough in innovation.
"If you don't get increases in productivity, earnings will be disappointing and the standard of living will rise very slowly," Wien said.
Meanwhile, equities on Tuesday posted their biggest one-day drop since the Nov. 8 presidential election on concerns that Trump would struggle to get his healthcare reform passed, leading to problems getting the rest of his agenda through, including tax reform.
To be sure, investors eased off from their bets on Trump in the latest week, snatching the most money from bank sector funds in more than a year and stockpiling bonds, Lipper data for U.S.-based funds showed on Thursday, Reuters reported.
U.S.-based taxable bond funds absorbed $8.3 billion in cash during the week ended March 22, the most in eight months, while investors withdrew $1.3 billion from financial sector funds in the worst week of net sales for those funds since July 2015, Lipper said.
Investors apparently are doubting whether the Trump administration can soon deliver the fiscal and regulatory changes needed to support the "Trump trade" of higher equity prices and rising bond yields.
(Newsmax wires services contributed to this report).
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