The Fed was cautious in announcing that it would begin cutting bond purchases, but promised to keep short-term interest rates low for a while. But he can be made to act faster if he thinks inflation is out of control. Fed intervention sparked the current bull market rally in March 2020 and it’s not hard to imagine that Fed intervention could end this.
Nov 18, 2021 9:05 PM ET
Stock valuations are stretched.
The stock market continues to move higher, and until that momentum changes, it is dangerous to assume the market will suddenly drop. But its long rise has consequences: most stocks are no longer trades. As Robert Shiller, an economist at Yale University, noted, an important stock valuation metric — the cyclically adjusted price earnings (CAPE) ratio — hovers in a narrow range, exceeded only in December 1999, during the dot-com bubble.
The Schiller Index cannot predict short-term stock market movements, but like other valuation measures, it suggests that stock market returns in the next decade are likely to be lower than in the previous one. Vanguard, for example, predicts that the US stock market will return just 2.4 percent to 4.4 percent year on year over the next decade, in no small part because of such high prices.
Other global equity markets have not rallied as strongly in recent years, and this is partly why Vanguard expects them to outperform the US market by nearly three percentage points year on year over the next decade. This is a reminder that a truly diversified stock portfolio is a multinational portfolio containing stocks from all major public equity markets (including China’s).
When the stocks are terrifying.
The past is not a guarantee of the future, but it provides clues. Countless academic studies show that the key to prosperity for lay investors is to hold stock for a long time and avoid market calculations.
This means that investors need to be able to sustain large losses periodically because the stock market fluctuates, sometimes painfully, as it did last year. Recall that from February 19 to March 23, 2020, the S&P 500 fell 34 percent. Further downturns of this magnitude or greater may occur at any time.
Are you uncomfortable? It haunts me.
Bond ownership is a great strategy for containing losses and keeping stocks at all costs. This is because bonds and stocks are inversely correlated most of the time: when one goes up, the other goes down.