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Stocks are Still Expensive and Dangerous

By LINDON, Utah - May 10, 2019 No Comments

The stock market hit a new record high last month, but that is a reason for fear rather than celebration. Stockholders are increasingly overconfident, and a sense of complacency is building in the market. The truth is that new record highs mean a return to near record levels of valuation. A crash is now more likely rather than less likely.  

Just last year, investors rightly feared another bear market as stocks experienced their worst year since 2008. Arguments for diversifying suddenly became more appealing when the gold price rose as shares fell. Many investors couldn't bear to take the losses and promised themselves they would sell stocks after a rally. With the S&P 500 near record highs again, it is a profitable time to sell. Most stockholders should have all their money back and more. If you are still sitting on losses, then you are probably in the wrong stocks and in greater danger. This could be the last chance to sell shares at high prices and buy gold before the next crash.

We are also leaving the best six months for the stock market. Historically, stocks produced almost all of their gains between November and April. The May to October period is better known for producing disasters. Last year's correction was just the most recent incident. The Flash Crash of May 2010 reminded us that it often pays to go away in May. More importantly, most of the horrifying losses of 2008 occurred during just two months: September and October.

Last but not least, stocks are once again near record valuation levels. Stock market capitalization as a percentage of GDP hit a record high of over 165% at the end of 2017. At those prices, stock market losses last year should not have been surprising. It's true we've had impressive GDP growth since then, but stock prices are also up. Remember, market cap was less than 138% of GDP at the end of 2007. The PE/10 ratio is another measurement of stock valuation, and it is now 31 compared to 24 at the beginning of 2008. Stocks are more expensive today than they were right before the financial crisis in 2008.  

The correction did not really correct the excesses in the stock market, so the danger remains. Increased volatility can warn us of an approaching crash. The October 1987 crash is one of the most infamous, but almost no one remembers the September 1986 correction. Unfortunately, investors are already forgetting the 2018 correction. It is only a matter of time before there is another crash. You don't have to lose half of your savings when it happens. When you invest in gold, you can avoid stock market crashes and get higher returns than with bonds. Now is the time to heed the lessons of the correction and sell overpriced stocks.