Ok, now people are getting jumpy. The market being down more than 1,000 points in one day gets people's attention. That's happened twice in a week.
Many people are asking whether they should pare back their stock holdings. We generally avoid switching gears too much for several reasons I will describe below. I do agree that equities are at the high end of their valuation range after a decade of decent returns. Several clients also thought that was the case 4000 Dow points ago when I talked them in off the ledge. Clearly that was premature, and I believe remains so today. But let's discuss perspective. Many indices have just recently eclipsed their 1999 highs (i.e.NASDAQ 100; symbol QQQ) taking 17+ years to recover. The Dow Jones 30 traded at 11,130 on 12/30/1999. It was still at that same level in 4Q 2011, twelve years later. That's because two 50% drops applied in the meantime; a feat only seen four times in history. Many say 50% drops are now common, which surely contribute to investor jumpiness. I believe in reversion to the mean, and it's unlikely I will see such abrupt losses again in my lifetime. Let's also be reminded that while parallels to 1999 levels are seen in the media, they never seem to acknowledge that current "prices" are much lower since we have 17 years of compounded earnings suppressing the P/E today vs then. Many companies earn twice the dollars per share today as compared to 17 years ago. If the index number is the same, you are getting twice the amount of value per dollar spent because earnings per share is what you are getting when you buy a stock. If earnings are twice and the "price" is the same, you get twice the value or half the P/E. Pundits see things absolutely by quoting today's index level vs 1999 index terms (5000 level NASDAQ index) rather than quoting relatively (price vs earnings; P/E), which I find more rational.
The market is surely euphoric about having a businessman running the White House. I was stunned that he got the tax package passed, and it's no wonder stocks have leapt. This is the biggest tax cut in US history, with Reagan's 1981 & 1986 versions being larger only when combined. Stocks in the 1980's and 1990's had two of their best decades ever. That's not a coincidence. It is however based on another interesting phenomenon that does not exist today; 12% (and declining) interest rates. Declining interest rates surely had a large effect on driving investors out of bonds and into stocks; a phase that seems nearly polar opposite to today. With the ten-year treasury at 2.8% today and seemingly headed higher, the backdrop of declining rates is likely long gone. The reversal of this decades-long trend is what has stock investors jittery for three reasons: higher borrowing costs sap company profitability, higher bond yields motivate stock holders to switch horses thus creating selling pressure in stocks, and memories of 1987 when interest rates quickly ratcheted higher and scalded stocks, albeit briefly.