It certainly was a couple wild days for the market while I was fishing Lake Okeechobee down in Florida. Gladly I was able to stay abreast of these important matters while also bagging a boatful of big bass.
The main culprit for the drop on Monday was a Goldman Sachs report outlining how they believe the market is overvalued by most measures. There is some merit to their points EXCEPT for the most important element. That being the value of stocks versus other investment alternatives… in particular bonds.
Their study went back 35 years. Meaning they started when the 10 year bond rate was at 9.1%. From there it went up to a peak in 1981 and has been on a downward course ever since. Meaning that in modern times, bond rates have never been this low and unattractive. Or real estate so lackluster. Or precious metals a non-factor.
I am NOT saying that stocks are cheap. I would say they are fairly valued pushing towards fully valued given the current environment. And yes, if that environment changes, then so too does my stock market outlook. Namely if 10 year Treasury bond rates climb to around 3.5% or higher, then the price of stocks will come under pressure.
For now the bull market is in place and the rise back towards the highs the last two days tells you that most investors are in agreement with that notion. However, it will be tougher sledding this year.
Gladly we know how to make money in these times by keeping a firm focus on earnings estimate revisions.
Best,
Steve Reitmeister (aka Reity…pronounced “Righty”)
Executive Vice President
Zacks Investment Research
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