How to Spot a Stock Market Inflection Point

Saving for retirement these days is a tall order.  It certainly hasn’t been like the good old days during the 1980s and 90s when you could blindly dollar cost average into a no load index fund and watch it rise 15 percent each year.  Those days are long gone.

Nowadays, with yields on the 10-Year Treasury Note perpetually stuck below 2 percent and the S&P 500 down from where it was at the turn of the new millennium, growing a tiny grubstake into something you can live off of has proven to be near impossible.  Still, you must try.  Moreover, what’s your alternative?

Social Security’s bankrupt, pension funds are broke, and, according to the Bureau of Labor Statistics’ inflation calculator, the dollar’s lost 23 percent over the last decade.  This means you must work harder, save more, and invest better than ever before…all for less in return.  In fact, just keeping pace with inflation is difficult enough – let alone actually building wealth.

Nonetheless, here at the Economic Prism we are not discouraged.  We welcome a good challenge like we welcome the silence before dawn.  While we’d rather not, we spring to each day before the roosters’ crow, and get after it like a stubborn mule.  Overtime, and with a little luck, we may gain a step on where we started.

Sometimes, however, gaining a step is easier than others…

Better to be Lucky than Good

There are times, decades or more, when the rising wealth tide floats up all boats.  During such times even idiots and imbeciles can improve their lot.  They ride the boom to a better place with little understanding of what propelled them there.

Year after year their mutual funds rise and their house value increases.  After a while they begin to take credit for their good fortune.  They may even offer unsolicited advice to acquaintances on especially savvy ways to put their money to work.

The problem with this fellow is…he’s a fool.  He just doesn’t know it.  Still, we don’t begrudge anyone for their dumb luck.  It’s almost always better to be lucky than good.  The point is, the last decade has not been one of those times when the wealth tide is rising.  Moreover, over the last decade the wealth tide has been receding.

However, while it may not seem like it, a stock market inflection point may be approaching.  It’s hard to believe, we know.  It certainly doesn’t feel like the stock market will ever be a good place to invest again.  But that may be changing.  Here’s why…

An inflection point’s never obvious at the moment it’s reached.  It appears to be just another data point in an unfolding trend line.  It’s not until after it has passed that one can look back and observe the course change.  That’s when it seems the inflection point should’ve been obvious to foresee.

How to Spot a Stock Market Inflection Point

No doubt, after a twelve year bear market, housing market blow up, financial crisis, economic bust, and the still looming government debt crisis, a new bull market is hard to fathom.  But if you close your eyes, turn your ears up just right, and focus your attention to your inner chi, you can ever so subtly feel the ground shift beneath your feet.

What we mean is, to spot a stock market inflection point you must look forward using imagination, conjecture, and guesswork.  If you are willing to give it a try, you may want to consider what follows…

According to Bloomberg, “Valuations for U.S. equities have been stuck below the five-decade average for the longest period since Richard Nixon’s presidency.

“Analysts estimate profits in the Standard & Poor’s 500 Index will reach a record $104.78 this year after increasing 125 percent since the end of 2009, the fastest expansion in a quarter century, according to data compiled by Bloomberg.  American companies are boosting income so much that even after stocks doubled, the S&P 500 hasn’t traded above its 16.4 mean ratio for 446 days, the longest stretch since the 13 years beginning in 1973.”

In other words, stocks are on sale, and they’ve been on sale for a long time.  No one wants to buy stocks because, for over a decade, they’ve proven to be a sure way to lose money.  This is what makes their price so cheap…and buying them so attractive.

Obviously, this goes contrary to most people’s investing psychology.  While humans can quickly discern a bargain price for a pair of jeans or a flat screen TV, with stocks, they have the uncanny ability to buy high and sell low.

Certainly, the housing market still isn’t out of the woods, the economy’s still soft, and government debt problems could result in periodic, and abrupt, stock market selloffs.  But one thing is clear.  Stocks are cheap and, over time, buyers will be richly rewarded.

Plus, Fed Chairman Bernanke’s pledged to keep the federal funds rate at practically zero through late 2014.  This won’t do a lick for the economy but it’ll do wonders to puff up the stock market.  Why not enjoy the ride?


MN Gordon
for Economic Prism

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