3 things that make today look like the Crash of ’87 & WHY that matters.
We look back in time to learn from history: taking away potential pitfalls so that we don’t repeat bad outcomes, and of-course potentially prosper.
Here we are pointing out some items that we found highly correlated to the market conditions of 1987, and what it means for you.
First: High P/E Ratios. The current P/E of the S&P 500 is over 25.
The P/E metric simply divides the current price of a stock by the earnings per share the company produces.
It is a widely accepted way of gauging current market conditions (consumer sentiment in real time) versus what is actually tangible and functioning within the company.
Importance: Higher P/E’s reflect a market that’s pricing in future revenue more than today’s.
Second: In ‘87 large-scale trading strategies called “Portfolio Insurance” gave a false sense of confidence. Likewise, today we have high frequency algorithms driven by supercomputers that move massive volume in just milliseconds which increases volatility. In both cases average investors cannot participate.
Importance: New technologies and the abundance of new market makers make macro-economic swings; forcing small retail investors to be reactionary in most regards.
Third: Rising inflation
Today’s housing market looks worse than in 2008, and global uncertainty is worsened by the short and long term effects of the Ukraine conflict. Both can increase inflation.
Importance: We are witnessing a fracture of globalization and supply chains. This has trickled down to our core market drivers, one being real estate. One could postulate that owning cash is locking in that inflation at -~8%. That’s a bad number to lock in obviously; so we suggest speaking with your Financial Advisor to go over how this specifically effects you and what options are available to you.
How does one invest in this environment with any certainty? Most investors should be asking themselves how much of a decline in their portfolio they can tolerate; while also being mindful of the effect it will have on current and future income. These are appropriate and timely questions given this new environment of shifting sands under us all.
Be pro-active and seek a customized analysis of your asset allocations that carefully inspect one’s risk/reward potential toward your goals at www.vtwealth.management
Vermont Wealth Management offers Securities Through International Assets advisory, LLC an Independent Registered Broker/Dealer Member FINRA/SIPC.
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Opinions expressed are those of John Bodnar and not necessarily those of Vermont Wealth Management and International Assets Advisory LLC. All opinions are as of this date and are subject to change without notice.