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April 17, 1999 There are signs that the stock market is getting dangerously high:
High market P/E ratio - the S&P 500 has a price/earnings ratio of 34.98 as of Friday. This is "hot growth stock" range and yet these are mostly old industrials. You'd like to see earnings growth match P/E, e.g. P/E of 15 justified by earnings growth of 15% per year. Do you see these S&P stocks growing earnings 35%? I don't. War danger - this war in the Balkans, who knows how big it will get? Sure it's not much now, but reservists are being called up, orders are going out for more cruise missiles, and so forth. The economy is going full steam right now. If some of it is diverted to the war, the growth rate of the non-war part will suffer. LBJ thought we could have guns and butter, but the market peak during his term proved him wrong. We got stagflation instead. Presidential election looming - the next election will be November 2000 which is 17 months away. Say what you like about Clinton, investors are used to him and have confidence in prosperity related to him. Whoever succeeds him will be an unknown quantity, and hence someone to worry about. Stalling earnings growth - earnings growth has been strong from year to year during this expansion, but last year it was actually negative. The current S&P 500 earnings are $37.71. A year ago they were $39.76. Not a good sign. General smugness about the market - year after year of 20% plus returns have lulled the public into thinking the stock market is a sure thing. Just on basic contrarian grounds, this can't be good. If everyone is bullish, where's the new money coming from? Now on the other hand - there's always another hand - what's to stop the market from going even higher? The Japanese stock market got up to almost a P/E of 100 before it crashed. What's an investor to do? My thought is to think about asset allocation. Take your age minus ten and keep that percentage of your net worth out of the market. The rise in the market has probably got you overloaded, percentagewise, in stocks. Sell some and put the money into fixed income assets, like a money market fund or a bond fund. Don't go nuts and sell everything, but definitely I would say lighten up on stocks. Friday's close: Dow 10493, S&P500 1319, NASDAQ 2484 All-time High: Dow 10493, S&P500 1358, NASDAQ 2598 September low: Dow 7539, S&P500 956, NASDAQ 1419 The Dow hit a new high Friday, but the S&P and NASDAQ lagged. Interesting how these often diverge.
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