Are Stocks Bargains Yet?
by Sheila Jamison and Rich Jamison
Calling the week just ended a wild ride would be an understatement. All three major indexes (DJIA, S&P 500 and NASDAQ) fell into correction* territory – even though they didn’t stay there. Two weeks earlier, rallies were the norm. Yet, those on Tuesday and Friday afternoons surprised most observers.
As noted in last week’s Market in a Minute, market dips are the ‘norm’ (as far as any market event can be called ‘normal’) rather than the exception. We’ve been living in that exception and have just come back to reality.
You’ve undoubtedly heard pundit after pundit say that this will only be a correction, not a bear market.* Further, many extol the bargains that have been created by the pullback. (Anyone see/hear/read Jim Cramer during the last week?)
We hope they’re right. To that end, conditions are in place for more gains once the market settles down.
- Our economic foundation is getting stronger
- Corporate earnings are growing, and expected to rise 18% in 2018
- After a ‘going too far too fast’ market, equity prices are becoming more attractive; the P/E for the S&P 500 is now 16.2 versus 18.8 two weeks ago.
- Interest rates are rising, but slowly and still well below historical rates.
Moreover, we’re seeing signs of market bottoming. So, is this now the bottom? Is it time to go bargain hunting? If not, what will the bottom be?
The short answer is we just don’t know – if this is the bottom, or, if not, when the turnaround will be. This could be it … or the market could fall further. Even if we are bottoming and the fall abates, large (and potentially costly) intraday swings between positive and negative can continue as it bottoms.
“We” in the last paragraph means everyone. You know our beliefs about prediction. It is impossible to know when we hit bottom while we’re in the process. We openly assert accurate predictions cannot be made with consistency. We will only know where the bottom was when we can look back at it from a future point. So, instead of using our Magic Eight Ball (younger readers may have to ask your folks about that one), we plan for all eventualities.
Trailing stops can protect against gains evaporating and raise cash. There will be bargains when this is done – and, because a bargain becomes one in the eye of the beholder, some already exist. However, each of us has to balance buying things at current prices against the possibility they soon could become even bigger bargains.
These questions have to be balanced:
Am I okay watching the price of something I buy now drop over the near term as long as it is higher sometime down the road?
How much am I able to watch it drop in the meantime without selling it?
What if the price goes higher immediately from here and I didn’t buy it?
This balance is a matter of personal preference and risk tolerance. Some investors are more concerned with a stock climbing before they get in; others with seeing a better buy-in price next week. Further, different securities might lead you to different answers. Only you can make decisions that are right for you.
Our answer is watch what the market does and listen to what it’s telling us. When it says the probability of making money has become greater than that of losing it, then we believe it’s time to strike. We feel this objective approach limits emotional reflex actions.
Keep in mind, though, that “the market” is really the compilation of all of its parts. Hence, what the market shows/tells us may differ from one security to another. That can mean the seemingly illogical “buy this one now but wait longer for that one” signal can arise simultaneously within still tumultuous overall market signals.
For now, we’re in alert mode, protecting profits, collecting cash and preparing our shopping list for the “right tomorrow” – whenever that tomorrow comes.
If you have personal questions, comments or concerns, please give us a call. We’ll help you work through your personal situation to reach a livable decision for you.
*a correction is defined as a 10% drop from the high; a bear market is defined as a 20% drop from the high.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.