I know you guys consistently say to never try to time the market, but I’m just curious as to what you think about the possibility of another big dip this year.
There are several things making me nervous right now ranging from the year end election and inflated prices to bad economic news in Q3. My company just announced another wave of temp furloughs due to depressed Q3 outlooks, and I’ll just say that if things are bad for us, it’s being driven by some of the big boys in the Ag, construction, and transportation sectors. If we see another wave of shutdowns due either to outbreaks or simple poor business conditions , is the market going to panic?
With something like a 401k or other active retirement plan, where you are making a monthly contribution, timing the market may barely be worth the effort because you are "dollar cost averaging." So you will buy some high and some low, but it will work out in the wash over a long period of time. But if you have a brokerage account with cash from selling a home, business, inheritance, or whatever... Or an old IRA that is not getting contributions anymore.... That's another story.
I am not someone that believes you can't time the market. Its why I started these posts. Now maybe you can't pick the top or the bottom, but you can definitely identify high and low. It's even easier on an individual stock level.
I treat each stock for what it is... I am buying a piece of the business and I expect a return on that investment from the future profits it will create. I also want to be able to sell my interests in the business in the future at a price higher than I paid for it. I always use the house analogy.
If my neighbor's house is going to auction and I want to flip it. I can say, well it's worth $150k to someone who lives in it as is... If it's fixed up with $35k of rehab it could be worth $200k. I'm willing to buy it for $125k. Anything more and I can't make any money off of it. Auction time comes and I will bid up to $125k. As soon as it goes over, I am out.
So to answer your question, I feel like we are in that auction and the bids are now up to $275k on a lot of stocks. More than that on some. Very few are still in my price range.
If you invested $1000.00 in the S&P 500 ETF SPY in March of 2000 and reinvested the dividends , it would have a been worth $1368.68 in March of 2013. So $368.68 of growth in 13 years before inflation. If you had looked at the forward PE of the S&P500 in March of 2000 and said it's extremely high and I will sit on my $1000 for a while and waited until March of 2003 to buy the S&P500, it would have been worth $2233.76 in March of 2013. 3.5x greater return... It's proof that cash is not always a bad place to be.
Now that's an extreme example because it was the very top and very bottom, so you will be very hard pressed to hit it in the head like that in real time. But it's not rocket science to look a chart like this and identify when the market is under and over priced.
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This brings us to today. The S&P500 is currently projected to have a forward PE of 23ish. This doesn't not even consider the ramifications of tax increases or a large 2nd wave of the coronavirus. Add in the long term risks to inflation and increased interest rates and we may look back on this summer as the most overvalued market in history.
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So will the market panic... Maybe not like before, but could we see a longer slow melt down from here to 2500, 2200, 1800, or lower? Absolutely. Q3 earnings, the election, and flu/coronavirus season all collide in November. That is a whole lotta risk to navigate. It might turn out that being in cash in 2020 is a better investment than it was in 2000.
