Dow 10K?

****The following article is from our new guest contributor,  Hao Jin, CFA, of Point Financial Advisor.  He will be contributing to the myWealth blog on an on-going basis.  Look for his profile later this week.

 

 

 

Current stock market is no bargain, but it's no bubble either, according to The Wall Street Journal. The market might be forced higher as more people come off the sidelines—most likely at the worst possible moment. Institutional as well as retail investors have been too cautious through the rally of the last six months.

 

(Take a shot!!….Chance to Win a FREE Currency Trading Course (VALUE: $99.00!!) by Emailing Us your answer no later than Friday 9AM EST and 3 Names will be randomly picked and named as Winners!! (Must be a blog subscriber) Which currency do you think will perform the best in the next 3 months? a) US dollar (USD) b) British Pound (GBP) c) Japanese Yen (JPY) d) Euro (EUR).

 

 

 

Ken Fisher, best-selling author and CEO of Fisher Investments which manages about $35 billion, says that based on past history of bear markets, the current rally is only about 50% done in terms of duration, although the steepest part of the advance has probably already occurred.

 

Fisher believes in the V-shaped recovery for the stock market: the rate of descent on the downside actually gives you the rate of ascent on the upside. It's an almost perfect ‘V’ and that ‘V' runs fully for a year, always.

 

According to Nouriel Roubini, professor of economics at New York University's Stern School of Business, there's a general consensus that the massive monetary easing, fiscal stimulus, and support of the financial system undertaken by governments and central banks around the world prevented the deep recession of 2008-2009 from devolving into the Great Depression2.0. If not reversed, this combination of very loose fiscal and monetary policy will lead to a fiscal crisis and runaway inflation, together with another dangerous asset and credit bubble. 

 

The temptation for governments to use inflation to reduce the real value of public and private debts may become overwhelming. Even though inflation might affect companies’ earnings, it makes equity more attractive than cash or bonds.

 

Compared to the 10-year Treasury bond, the S&P 500 is still attractive. The following chart shows the ratio of S&P 500 P/E vs. 10 Year Bond’s “P/E” (1 / yield) over the last 27 years.  Now, the P/E of the S&P 500 is 15.2, while 10-Year Bond’s is 1 / 3.5%=28.6. The ratio is 0.53, which is in the historical low range. In other words, the 10-year bond needs to yield 6.5% to allure investors away from equities.

 

 

 

 

Source: S&P 500 Historical P/E is from Standard and Poor’s, while the 10-Yr Bond (%) is from Yahoo Finance.

 

The following table shows the top 10 holdings of SPDRs (SPY):

 

Source: http://finance.yahoo.com/ as of Sep 21, 2009.

 

 

 

On October 17, 2008, Warren Buffett published the article, “Buy American. I Am” in the New York Times. If you have a long time horizon, such as 5, 10 and 20 years, it is still a good time to buy stocks. However, if you already have 60% or more of your portfolio in stocks, then I don’t recommend adding more to equities now.

 

Cheap, immediate information and falling brokerage commissions have produced a generation of active investors. In the meantime, excessive trading has lead to poorer investing results, according to an article in September/October 2009 issue of CFA Institute Magazine. So be sure to limit your trading in long-term investment portfolios.

 

To learn more about how to invest and to trade in the financial markets, be sure to check out our investing and stock trading courses!

 

Disclosure: I have long position on SPY.

 

Stocks:  CVX, GE, IBM, JNJ, JPM, MSFT, PG, SPY, T, XOM