Henry Bonner – Strategy and Council Letter (Switzerland) –
Here in Dublin … we are in conference all this week …
Last week, we see signs of turmoil in the markets … because most computer giants were down.
Stock markets – the CAC 40, the S & P 500, the Nikkei – were down due to the decline in the IT sector.
On the other hand, this week, the situation seems to have stabilized … and the Paris Stock Exchange is on the rise again today.
We have alerted our readers that the market is expensive at the moment.
Compared to historical levels, stock prices are high in relation to corporate income.
The price of the S & P 500 is 29 times the annual revenues of the companies in the market.
On average, since 1880, the average for the market price is 16.8.
When the market goes up too high, then it should tend to fall down over time … just like any other good on the market. Ultimately, its price is expected to fall.
Others do not believe that the market is ready to retouch its historical average … as the analyst Heath White at SeekingAlpha:
“Are we ready for an apocalypse in the evaluations? I do not believe. First, because these high prices have already lasted for 20 years historically, even through the crises of 2002 and 2008. The market has only adjusted its average valuation levels during the worst period of the financial crisis.
“If we only go back to normal when we have a crisis of this magnitude, then will we really go back to normal? Probably not.
“Market valuations have become higher than usual, and this phenomenon will remain in place.
“In part, because the price of bonds is much higher than usual.”
“Equity markets are competing with the bond markets, and these bonds are expensive at the moment. As long as the bonds are expensive, interest rates are low, which encourages the investor to put their money into the shares of the companies. “
White touches a critical point:
Bonds are expensive … partly because the Fed, the ECB, and the Bank of Japan spend billions of euros a day to support them.
As a result, stock market valuations depend on these interventions in the bonds …
If the ECB suddenly stops supporting the obligations?
So our stock market could fall right away …
What to do…?
Everyone believes that the stock market is meant to climb higher … but beware.
Even if you put a lot of your money into the markets, have at least a “retreat plan …”
In other words, have assets that will allow your fortune to survive if the intervention of the ECB, the Fed, and others, in the markets leads to disaster …
We would recommend having a little gold … a way to grow your own food … or a way to ensure your family’s way of life in the event of a financial disaster …