Predicting the stock market has always been a fool’s errand. Every trader does it…ok, well 95% of traders do it, and the other 5% lie.
The prognostication of the stock market after the election was:
- Hillary Clinton wins, it will continue to go up to new highs.
- Donald Trump wins, the stock market will crash.
We will never know what would have happened in scenario 1, since Donald Trump won the election. But we do now know that scenario 2 was wrong. The stock market is at all time highs.
I had stayed neutral, but mostly in cash, because I believe the market overall is extremely overheated, due to the near-ZIRP policy of the Fed. When you do the discounted cash flow method of determining a stock value, you have to compare it to the “risk-free-rate”, which is near-zero. Once that rate goes up, DCF stock valuations will go down. When you do the P/E/G method, the current CAPE is at one of the few historic highs.
I believe a bear market will come upon us. “I thought you just said you can’t predict the market direction!”, you might be thinking. Yes, I don’t know when this bear market will occur, and I don’t know the depth of the decline, but there will always be a bear market.
However, on a long enough timeline, the market will always go up.
[…] an all-time high of 381.17. (Looking back, the market Case-Shiller Adjusted Price to Earnings [CAPE] was around […]