The Market is Irrational, and I’m OK With That

John Maynard Keynes is widely considered one of the most influential economists of the 20th century and the founder of modern macroeconomics theory – but I don’t agree with a lot of his body of work.

After all, virtually every government in the world uses Keynes’ theories to justify perpetual budget deficits in the name of fiscal stimulus. (I suppose in Keynes’ defense, he also advocated that governments run budget surpluses when the economy is strong so as to balance the budget over a full economic cycle. Someone might need to remind Congress of that…)

But while I have my differences with Keynes as a policy wonk, I actually tend to agree with him when it comes specifically to the markets.

After losing his shirt in a currency bet gone wrong, Keynes famously commented, “The market can remain irrational longer than you can remain solvent.”

I’m reminded of those words when I look at today’s stock market.

According to FactSet, S&P 500 earnings grew 2.1% last quarter, and revenues grew 5%. Those aren’t exactly numbers that make you want to light your cigar with a burning $100 bill.

Now, Hurricanes Harvey and Irma clearly had an impact last quarter, but earnings and revenue growth for full-year 2017 are only expected to be 9.1% and 5.8%, respectively. Those aren’t terrible numbers, but they’re hardly enough to justify today’s valuations. The 12-month forward P/E ratio just hit 18 – its highest level in 15 years.

But if you’re thinking about betting against this market, I would tread very carefully. This is starting to feel a little like the 1990s again…

Do you remember when former Fed chairman Alan Greenspan warned of “irrational exuberance” in the stock market? Contrary to popular belief, it actually wasn’t near the top of the dot-com bubble. He uttered those words in December of 1996… more than three full years before the bubble finally burst.

Greenspan was right, of course. The market already looked frothy in 1996. But it got a lot more frothy before the whole thing crashed and burned. Had you shorted the market at the time of Greenspan’s quote, you would have been wiped out. The S&P 500 nearly doubled between then and the eventual peak.

I’m the first to admit that I don’t know when the music stops. But I’m also perfectly fine with that because my colleagues and I are prepared whether the market goes up, down or sideways.

As a case in point, Adam O’Dell has used intermediate trend following strategies to make money for his Cycle 9 readers since 2011. And his newest offering – 10X Profits – has generated fantastic profits trading volatility itself. Whether the S&P 500 doubles from here or crashes tomorrow, Adam’s algorithmic trading models should keep trucking along, doing what they do best.

I could make the same claim for Rodney Johnson and Lance Gaitan’s trading services. Rodney’s Triple Play Strategy runs a concentrated stock portfolio based on momentum indicators. It rides hot stocks higher and avoids the laggards. And Lance routinely generates triple-digit gains trading options on bonds. Neither of these strategies depends on the market going higher from here.

And then there’s me. My beat is generating dividends, and the recommendations in my Peak Income letter sport an average dividend yield of 7%.

Of course, a nasty bear market can erase many years’ worth dividends, so I’m very strict about setting and raising stop-losses to protect our gains along the way. Should the bear start to growl tomorrow, my readers would walk away with minimal damage to their nest eggs.

Harry’s research suggests that the market could head south before the end of 2017. (To hear more about that in Harry’s own words, sign up here for free to catch his special presentation on Wednesday.)

If it does, I say bring it. We’re ready.

But if that irrational market just keeps getting more irrational, I’m perfectly fine with that as well.

We’ve already booked solid returns this year. So long as the market keeps throwing fastballs down the middle, I’m happy to keep swinging.

Charles Sizemore
Editor, Peak Income

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Categories: Markets

About Author

Charles Sizemore is a research analyst with Dent Research. His primary research focuses on income, retirement strategies and fundamentals.