It’s just doom and gloom everywhere we look. Be it headlines in the daily newspapers, the TV stations, the radio stations, the Internet… I’ve never seen so many media outlets following the stock market. The amount of disinformation being circulated is doing a very good job of scaring the American public.
Let’s face it: the young reporters of today have no analytical experience with the stock market. On the TV converter, I can find four consecutive channels reporting on the stock market and Wall Street, many headed by reporters and journalist in their early 30s, all talking about this new thing they’ve labeled the “American Crisis.”
To really understand the stock market, we must understand Stock Market 101: The stock market is a leading indicator. It tells us what is going to happen in the future. Secondly, the stock market does the opposite of what investors and the general public expect.
If another Great Depression is coming, I’d say that it is going to be the most well-publicized event in economic history. I turn on my computer this morning and the first headline I read is “Equity, commodity market may be next bubble.” I just wonder how that reporter knows that.
I stick to following the numbers and I suggest my readers do so as well. The biggest and most widely followed stock market in the world, the Dow Jones Industrial Average, has these numbers to report:
— In spite of the stock market “crashes” the media is telling us about, the Dow Jones is down 17% so far this year. The same index gained eight percent last year; over the past 21 months, the Dow Jones was down nine percent, hardly what I would call a crash To make me really worried about the economy, I would need to see the Dow Jones down over 20% in the same period…and we are far from that.
— The Dow Jones sells at a price/earnings multiple of trailing earnings today of 16 and 13 times projected earnings. This is hardly bargain territory. I’ve always used a 10 times earnings multiple as a bargain for the stock market. We need to seriously ask, as a leading indicator, if the economy is in such trouble, why is the Dow Jones price/earnings ratio still so relatively high?
— If you bought the basket of the 30 stocks that makes up the Dow Jones Industrial Average today, you would get a dividend yield of three percent. Historically, three percent is a low dividend yield…but interest rates are still relatively and historically low. Thirty-day Government T-bills pay less than one percent! Hence, the Dow Jones is paying three times the T-bill rate, which is historically a bargain.
— Finally, as you know, I’ve been obsessed with the 50% principle. That market theory holds that, if the Dow Jones Industrial Average can hold above the mid-point between its low and high, the technical picture for stocks is strong. The mid-point between the market’s 2002 low and the market’s 2007 high is about 10,700. As soon as we get below 10,700, the stock market bounces back like an elastic. The next few days and weeks of trading for the stock market in relation to this indicator are vital for overall direction.
The bottom line for me is this: The stock market is in much better shape, and is more positive about the economy, than investors and American consumers understand. The “herd” may be fooled again. Warren Buffett seems to think so. Buffett has made some great investments this month, as he put $5.0 billion into Goldman Sachs and now $3.0 billion into General Electric Company. I guess he’s one investor who sees the stock market as a bargain.