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Is It a Fool’s Rally?

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You have watched the market fall and rebound in the last few weeks. Is it a fool’s rally? In The Wall Street Journal, James Mackintosh suggests market valuations signal caution. He writes:

The pushback I most often receive from readers is that true investors should ignore the day-to-day swings in the markets that obsess traders and just buy and hold stocks. There’s a kernel of truth in this: Most fund managers underperform, so what chance do individuals dabbling in the markets have? Better to buy the index.

However, even the longest-term thinkers should adjust their portfolios when prices are way out of line with reality (the dot-com bubble or the Covid bust, bonds at close to zero yield, the SPAC/cannabis/clean energy bubble of late 2020-21). The question is how to judge.

I’ll consider three gauges here, the CAPE, the forward PE and the Fed Model. All show that the offers being presented by Mr. Market—as legendary investor Benjamin Graham personified it—are unattractive for large U.S. stocks at present. They are expensive not only compared with the past but compared with smaller stocks, foreign stocks, corporate bonds and Treasurys, too.

If these measures are right, the rebound of the past couple of weeks is a fools’ rally, and it’s time to switch away from the biggest stocks.

Action Line: When markets are like this, it’s not necessarily what you invest in but how you invest. There are plenty of opportunities to get your portfolio mix in line with your retirement life. When you want help, I’m here. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.
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