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2000 and beyond

August 26, 2014

Stocks have hit and stayed over 2000, which is a remarkable feat as well as historic. Of course, the current price levels have me a bit skeptical as well as a little fearful for investors jumping into this overvalued market. Earnings have been increasing, but this doesn't mean that we should be willing to pay higher multiples on those earnings. It also doesn't mean that we should only use earnings as the basis of our investment decisions, I'd personally rather use free cash flow. Quantitative Easing, or QE, will end soon, and Fed Chairwoman Yellen has already indicated that she doesn't intend to raise interest rates.

The Fed's involvement in both keeping interest rates low by buying short-term bonds and inflating prices has really been the support system for the economy. Of course, this cannot continue forever. Corporate growth is a little comforting and will hopefully be sustainable without the Fed's extra involvement in the economy. However, it doesn't justify paying higher and higher prices.

In addition to all of this, there hasn't been a correction in over 5 years. Most analysts will describe the current stock market as being resilient, which has to mean that they are surprised by the relentless rise of the market regardless of new information or overvaluation. These same analysts would argue that the market will continue to be resilient to the end of the year, and to the projected Fed interest rate hike in summer 2015. Hopefully a correction happens sooner rather than later, because the decline would be far worse the longer it's put off.

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