Welcome back to Close Calls for the week of October 20 through October 24, 2014. They give you the trend, I give you the forecast.
What a rush! There's no way to explain to a non-investor what it is like when stocks just zoom higher and higher for no apparent reason. Of course, they zoomed down in the previous week for no apparent reason either, and this can be said without much fear of contradiction, unless someone out there cares to make an impassioned argument that 18.2 is a better, sounder average S&P 500 P/E Ratio than 19. As there is no real basis for why one valuation is fundamentally better than the other, it is clear that the moves we have been seeing in recent weeks don't really have that much to do with the value of stocks.
How could that be? Well, remember that a stock price is a relationship between the value of a stock and the value of money. It isn't the absolute value of money (i.e., anything to do with inflation) that I'm talking about, but another force that is even more powerful, at least in the short-term: the flow of money into and out of the market. A lot of blame for why money was yanked out of and then crammed back into the market has been placed on fund managers, and this is almost certainly justified. There is some herd mentality going on among those who are paid to know better, but I'm not complaining. In fact, to the fund managers who sold stock when the S&P 500 was below 1,850 only to buy it back when it crossed back above 1,950, I say, paraphrasing the oldest one in the book, “I don't have to outsmart the market. I only have to outsmart you.”
What we just got out of was the eighth or ninth bull market correction just in this bull market, many of which have had very nearly the same story. I urged investors to stay the course or buy more stock in July of 2013, in February of 2014, and I did so again in October of 2014. If you're willing to listen to me again next time, I'll probably be willing to say the same thing again then. This market still has a lot to give, and give it will.
Because she loves you, and you know that can't be bad.
Stay tuned though. For next week, I foresee a truly shocking reappraisal.
Here's what I had to say this week.