Last week, we discussed price earnings ratios in the stock market and how many of today’s tech giants are priced at huge multiples. Remember, P/E ratios reflect how many times earnings must be achieved to equal the price the stock is selling for.
We are hearing every day from Washington why we need to give away trillions of dollars because the economy is in such bad shape. We hear that evictions are about to become commonplace and many people are losing their homes.
Yet, since the Russell 2000 hit its low on March 18, 2020, the index is up 130%! How can the stock market and the economy be so disconnected?
There are probably several reasons. First, investors are so afraid they will miss the next upswing, they are not facing reality. Some investors believe things have to keep climbing as the economy improves. This growth most likely is already priced into valuations.
Warren Buffett once said he believes the best measure of where valuations stand at any given moment is the ratio of total weighted market cap value to GDP – the gross domestic product of all things we make and services.
Right before the crash in the first quarter of 2000, it was 1.37. A few years later, just before the last market crash, it was 1.05 in the second quarter of 2007. In the last quarter of 2020, it was 1.72!
Wow. This is dangerous.
Probably the second reason for this is that the economy might not be as bad as we are hearing from Washington. There are some segments of the economy that are hurting very badly. Restaurants, entertainment, hotels, travel and many small businesses have been struggling. They need help. The unemployment in these segments is very bad. Help should go to those who lost their jobs to the pandemic only.
The rest of the economy, however, is doing much better. Many people have higher savings rates than they did before the crisis because they did not go on vacations last year, eat out as much or attend entertainment events. Many worked from home, saving work expenses.
Home improvement stores have been booming and raising prices because of the demand. Everyone likes free money. The question: Is it really free. The national debt is exploding. Visit www.usdebtclock.org. It will cost our children and grandchildren decades of work to make a dent in it.
What about all of the people who followed the rules and paid back their student loans as agreed? Should they be penalized by watching others have their student debt wiped away? Is that fair?
What about people who did not attend school. Should they have to pay for those who did? Many people I speak with don’t think this should happen.
The stock market and huge budget deficits have potential to ruin retirement for many hard-working seniors. We have some control over one of these areas, by how we allocate our investment portfolio.
While there is never a good time to lose money in the stock market, there is a worst time. That is right before or early in retirement. Then sequence of risk can wipe out a lifetime of savings. You cannot ignore or wish away this possibility.
The exploding government debt is a situation we can only address by letting our elected officials know how we feel. When running for office, they like to tell us how independent they are from leadership if it does not address their constituents’ concerns. Maybe this is time to let them know how you feel.
The high market valuation and huge deficit are bubbles that could create the perfect storm to ruin retirement. Can we wait for them to burst?
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, email Rick Shrum at email@example.com.