Equities have outperformed our economies by a wide margin, with valuations now sitting at over 22 times earnings. How significant this statistic is can be debated, but it’s something we all need to be aware of.
For seasoned investors like me, this is an exceptionally high level. I remember when we used to say 15 times earnings was excessively high, so who knows what “normal” even is anymore?
I’m certainly no expert on valuation metrics, but after such a massive rally this year, it seems only a matter of time before this equity strength begins to fade and the markets start to correct.
I understand that nobody wants to stand in front of a stampeding herd of powerful and confident bulls. Right now, everyone following the “trend is your friend” mantra is reluctant to hear what might be lurking around the corner. But we could soon face a period, especially as the U.S. elections draw near, when large institutional traders start taking risk off the table. When this happens, fund managers will begin selling equities, locking in some impressive profits along the way.
This outcome isn’t a foregone conclusion, but it’s certainly something worth considering.
Those with more expertise than I have are expressing concerns, albeit cautiously, choosing their words carefully to avoid causing panic. However, it wouldn’t surprise me if some insiders have been quietly reducing their exposure, taking advantage of this remarkable rally to secure the gains they’ve accumulated this year.
I’m sure the AI enthusiasts and those who like to quote the gods at Berkshire Hathaway won’t appreciate hearing from someone who thinks this bull run might be nearing its end. But I’ve seen this mentality before—before the dot-com bubble burst in 2000, and again in 2007, just prior to the global financial crisis. Back then, the strength in equities lasted much longer than expected. Some of the most vocal bears ended up sprouting horns themselves, waving the white flag as the market charged on.
When exactly a major correction or trend reversal will occur is impossible to predict. But I believe now is the time for investors to stop taking this rally for granted and start thinking seriously about protecting the profits they’ve enjoyed.
From my perspective, this is the moment when investors should be banking their profits on equities, or at the very least, raising their protective stops to safeguard gains before they turn into losses.
Sure, we might see one more powerful surge upward, perhaps triggered by a surprise event—like a Trump victory. But I’m not willing to play the hero and wait for the perfect selling point when there’s already so much profit on the table that can be easily cashed in.
Let’s not forget, the market will still be here after the election, and the year after that, and the one after that. Markets last forever but take it from me—trends do not.
Don’t misunderstand me. I’m optimistic about AI, hopeful for Trump’s “drill, baby, drill” agenda, and even wish that China’s stimulus measures will rekindle global economic growth. But as a trader, I’d rather protect my profits now than wait for the moment when the tide turns, and I’m left scrambling to limit my losses.
Some may accuse me of crying wolf, but I remember all too well writing a similar warning in October 2007, and again in November 2000. Both times, I was met with scepticism and criticism. Yet, we all know what happened just a few months later.
Past performance is certainly no guarantee of future success. But if history didn’t have a habit of repeating itself, why would anyone bother analysing charts?
I don’t know how much higher valuations can stretch relative to earnings, but given this year’s extraordinary run, unless you believe the sun is going to shine every day, it might be a wise moment to consider how you’ll protect yourself before the trend shifts.
The post Is the Noise of the Herd Being Heard? first appeared on JP Fund Services.
The post Is the Noise of the Herd Being Heard? appeared first on JP Fund Services.
The post Is the Noise of the Herd Being Heard? first appeared on trademakers.