What a couple of weeks ago was predicted as going through a quarantine to confirm a good market year may end in exuberance at the close of 2024, with a Christmas rally included. The monthly survey of fund managers by Bank of America, after Donald Trump’s victory, has improved expectations for economic growth, and not only in the United States, but also in the global economy. From a soft landing it seems that the market wants to see an acceptable increase in GDP. Despite the increase in inflation, managers are once again tilting their portfolios towards the US market, and point out that the main beneficiaries will be the country’s stock market, especially small capitalized ones, and the dollar.
If this scenario is correct, perhaps the profit multipliers paid today in the market are justifiable. It must be taken into account that the PER for next year is 30% higher than the average of the last three years for the US stock market. In the case of the European the premium is close to 10%. Of course we cannot speak of a bubble if the improvement in profits continues, but the exuberance is unquestionable. It is time to remember that tattoo that we investors have engraved on our skin that “you have to be greedy when others are fearful and cautious when others are greedy.”
As there are two great forces that move the markets, fear and greed, and it is the latter that has taken control, decisions must be made. A few weeks ago I commented that a traditional mixed portfolio had to be invested from 60% variable income/40% fixed income to 40% fixed income/60% variable income.
I go a little further. I believe that for every 5 percentage points that are overpaid in the stock market for company profits, the exposure to equities must be reduced by that same proportion. That is the reason why I believe that if we are paying an average premium for buying the average US and European stock market of 20%, we must reduce the portfolio-to-stock market exposure to 40%, if we are talking about a traditional 60/40% portfolio. . Be careful, I’m always talking about indexes! Essentially for those who do not use quality management and prefer indexing.
The same reflection leads us to the fact that if the premium were above 50% we should close practically the entire portfolio, because it would be a clear indicator of a bubble. Decision that in the unlikely event that it happens would clash with my atavistic resistance to never abandon the market, because the investor is not always the one who wins, he is the one who is always in the market.
On the other hand, if a scenario were to occur, in which we were not witnessing a sharp deterioration in profits, with a greater discount compared to the average PER of 40%: we would have to reach 100% of the stock market.
#Squaring #circle #talk #exuberance #market #prices
