The macroeconomic fundamentals have improved in 2013 and momentum for stocks is upward so it may be tempting to take the plunge and buy stocks to benefit from the improving economy. The problem is that the economy often has significant time lags or poor correlation with stock prices. An era of rising GDP doesn’t necessarily mean rising corporate profits or rising stock prices. Investors should seek independent financial advice about the best investment ideas for 2014.
Has a new era been established where the economy is on a permanent plateau of prosperity that justifies a permanently high PE ratio? The PE10 has been running too high for much of the past 20 years. Intuition makes one think that a bubble can only last few years, however a bubble is based on an irrational false belief, so its irrational nature provides no reason why it must end in a few years. If the Federal Reserve keeps lowering interest rates for over 20 years this could create a false trend that contributed to a stock bubble.
A rebuttal of the PE10 theory has been circulated on Twitter by an anonymous poster. I feel strongly that PE10 is legitimate and does work. What PE10 does is it filters out short term and intermediate term sudden bursts of corporate profit and thus eliminates dangerous misleading unsustainable trends. This was an excellent way to reduce the risk of losses from bubbly tech stocks during the 1998-2000 bubble or the 1929 bubble. The most important part of investing is to avoid excessive risk and excessive losses because losses are asymmetric compared to gains. If you lose 50% then you need a 100% gain to break even. Investors should seek independent financial advice about how to understand how to protect their