it's that time of year...
What's Next - Minor Correction or Major Meltdown?
Would you buy the Dow Jones at 10,000? It probably depends on where you see the Dow trade a week, a month, or a year from today. Many investors and Wall Street gurus are advocating to buy the Dow at current levels.
Let me ask you this: Did you buy the Dow at 7,000? If you didn't buy the Dow a few months ago at 7,000, why would you buy it today at 10,000? Today's Dow is 50% more expensive than it was seven months ago, yet more people are willing to buy now than in March. Aside from the stock market, there is no other 'salesman' able to sell a product for a 50% premium.
...Even though prices have come off multi-decade lows, earnings are lower than any other time since the Great Depression. The S&P 500's P/E ratio (stock price divided by annual earnings), based on actual reported earnings have sky-rocketed to all-time highs.
Anybody buying the S&P 500 at current prices is paying 138 times as much as reported earnings. In other words, based on this year's earnings, it would take 138 years of profits to repay your investment.
Would you buy a Subway franchise at 138 times its annual profit if you knew that 15 - 20 is the historical average? 15 - 20 is the average P/E ratio over the past 100 years. Anybody buying now will have to be prepared for significantly lower prices.