It Takes 3 Years to Make Us Believers

Yes, the stock market is overbought, and in most cases over the last three years, this has been a warning.  Yes, the S&P 500's price-to-forward earnings ratio has moved up to (and slightly above) the 13 level, and in the last three years, that has been the top of valuation band that investors were willing to pay.  So here we sit, conditioned by the last 3 years.  We see the S&P 500 that is the proxy for most of us as being the "stock market," and we see that peak in 2007 and all the trend lines we can draw, and it sends thoughts of an impending top up and down our spine.




I have to remember that Mr. Market does everything in his power to condition us in the wrong direction, and psychologists tell us that it takes about three years to make us believe that recent history is the new normal. We have to remember that, of course, but we also have to recognize that these last three years have been extremely distorted by world events, and in many ways, those world events are starting to show some progress on being solved.

That has been our life for the last three years, and we were conditioned for this by 15 years of very disruptive stock market action.  It would present promise, and then Mr. Market would pull the rip cord.  The public investor is exactly where Mr. Market wanted them.

This makes it pretty obvious why our Asset Allocation Model is NOT based on just the last three years, but it looks at 50 years of data, and gives us the results to what to expect.  Today, we are at P4, M2 and V1 (which you can see from Monday's post by clicking here), and even though we're cautious here in the short-term, our model continues to tell us that this bull market is still alive and well.


Don Hays 

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