In media interviews, Derek Foster justifies getting out of stocks based on “doing lots of research” on certain indicators. We’ll take a look at them in this post.
Valuations were lower when the stock markets crashed in the 1930s and later in 1973 to 1974, he points out. The dividend yield on the Dow Jones industrial average fell to 6 per cent before, but is at 4 per cent today. The price-to-earnings ratio of stocks fell to the single-digit range before, but is still in double digits now.
Valuations are an inexact science and applying past trough P/E ratios to today’s trough earnings may not be appropriate. The Peridot Capitalist points out that in 1974, the S&P 500 had a P/E of 7 but earnings were at record highs for the time. I’ve never heard of the dividend yield on the Dow being an indicator but the yield on the Dow has been low for a long time now.
The total market value of stocks fell to 50 per cent of the gross domestic product before, but is at 70 per cent today.
It is true that stock market capitalization to GDP has been lower before but this article points out that the current valuation are at the 70th percentile when looking at past recessions. In other words, it might get better from here, or worse, who knows?
It is almost impossible to figure out short-term stock market moves and smart investors don’t even try. Derek could try and sound smart by quoting a bunch of metrics but what I see is simply another retail investor throwing in the towel.
