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A Black Rolls Royce and a Martini: Is the Stock Market Too High?

It seems like the world stock markets have been in high gear since the general election this past November. The S&P 500 has appreciated over 15% in just three months! We all know that the markets can move down just as easily as they move up. Over the years, there has been a remarkable amount of resources used in an attempt to predict the movements and direction of the markets. The problem with most of these predictive attempts is that they are mostly based on logic and mathematics.

Is the Stock Market Too High?

Back in 1985, I was a young stockbroker with Paine Webber. The stock market was on fire, making new highs virtually every week. One of my favorite clients at the time was Jack Meletio – owner of Meletios Seafood here in St. Louis. Jack drove around in a big black Rolls Royce and was quite the character. He had been a member of the St. Louis Stock Exchange and had an extensive stock portfolio. We used to have lunch at the Old Coal Hole (now Dominic’s) in Clayton. Of course, I paid a lot of attention to what Jack shared with me about the markets, ignoring, for the most part, the two martinis and a cracker that he called “lunch.” I remember that day the Dow Jones had just crossed 1400 for the first time. Jack expertly speared the olive out of his martini with a toothpick and chuckled that the stock market was way too high, and that he was going to sell everything! As far as I know, Jack never got back in the market. That move back in 1985 tormented Jack for some years until I lost track of him. When he passed away in 2001, he would have missed a 6x return in the Dow.

Emotions such as arrogance, fear, and greed play a much deeper role than most investors want to realize. The markets are always trying to digest the new information that endlessly comes in. Is this new information good or bad? Has the market already factored in this new information or does the price instantly jump or dive trying to account for the new information. The outcome of the Brexit and Trump elections were a perfect example of how unanticipated news can rock markets – but in what direction? A mystery!

There is no friction or physics holding back the price change of stock, bond, or commodity. An emotional and desperate seller or buyer could show up in the next five minutes with a huge order that instantly and unpredictably creates an imbalance. The other market participants are left scratching their heads; did they miss some new information? Who is behind this new and unanticipated order flow and why?

Timing markets is a wickedly bad idea

The truth is that markets have been making new highs since there were markets. While nothing is perfect, the best way to deal with unpredictable jolts in the markets is to hold true to your investment policy and re-balance. Accept that downturns and runaway jubilation are characteristics of the capital markets. Spending resources and trying to dance in and out will most likely lead to despair and regret.

  • Stay Diversified
  • Rebalance
  • Ignore the Noise

February 28, 2017
Jim Winkelmann
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