Tahoe Market Pulse: Stock prices more volatile than stock values
March 25, 2015
The world's central bankers, many of whom criticized the Fed for quantitative easing (QE) seven years ago, are putting on what amounts to a full-court press to boost economies and inflate asset prices.
Their QE is pushing stocks higher across the globe. The Nasdaq's move above the 5,000 level captured headlines here.
Comparing today's price-to-earnings ratios to the height of the technology bubble shows how time (15 years) and higher profits make the large Nasdaq technology stocks much cheaper today.
Microsoft's PE was 57, now it's 16. Cisco's was 127, now it's 13. Intel was 43, now it's 14.
That isn't to say the Nasdaq recovery and overall bull market has moved in a straight line. Bull markets never rise uninterrupted and this one has had its share of swoons.
Sir John Templeton was one of history's most successful investors. One of his spot-on epigrams is worth repeating given day after day of triple-digit moves both up and down for the Dow Industrials.
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"Stock prices are a lot more volatile than stock values." Indeed.
In last week's announcement and press conference, the Fed lowered its outlook for GDP growth and inflation. The former will not reach 3 percent this year nor in 2016 or 2017.
Inflation will rise, but not reach the Fed's goal of 2 percent. This outlook isn't the recipe for higher interest rates.
Day after day of triple-digit moves can become a bit unnerving, to put it mildly.
Some investors say Wall Street is a casino and they want no part of it and its volatility, flash crashes, comments about it being "rigged" and more. Understandable, but also unfortunate. What does that leave them?
Bottom line: A full-court press by the world's central banks is a powerful tailwind, one that will take stocks still higher while naysayers give all the reasons why what's happening in the real world shouldn't be happening in theory.
Ignore the daily swings as best you can (easy for me to say) and keep John Templeton's timely epigram in mind. In short, stock prices are very volatile, stock values, not nearly so.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.