Reader Mailbag: Is the Market Overvalued and other stuff

From the Reader Mailbag

Before you read this, I need to confess, I didn't get much sleep last night. You don't need to know the details, and I don't want to place blame but it was the dog's fault.  Two hours of sleep and writing don't typically mix for me, but I actually had a "reader" request so I felt obliged to suck it up and carry on.  Just be warned, I am sleep deprived and haven't showered, but I am listening to the Foo Fighters, so let's give this a go. 

Now to the reader mailbag.  I don't really have a mailbag, but I do apparently have one reader and that is pretty awesome.

Reader writes: Scott, could you "address the market being over-valued and the potential for it to fall later as well as the potential for inflation?"  You're the best! (that last phrase wasn't actually written, I added it for my own ego).  

Thanks reader, those are great questions and I sure can address them!

Some have said the market is over-valued, we are in a bubble, and a fall is imminent. Some others, sometimes the same people, but not always, say the low interest rates, the possibility for even more stimulus and the Federal Reserve's "loose" monetary policy are adding massive inflationary pressures.   

This is all true.... that some have said it. 

Others, however, have said just the opposite.  That stocks will grow into their valuations, that there is still upside, and the Fed has smart people and know what they are doing and will raise rates when appropriate to keep the economy from overheating.  

Who are all these people? Who is right?  And most importantly, what do these conflicting message mean for you and your investments?

“there is no voice that speaks “for the markets”

Friends, there is no voice that speaks for "the markets."  The market is not a singular entity.  It is a lazy oversimplification to say that the market does "x" because of "y".  It is an attempt to make an orderly story of a million different, random narratives because we, as humans, don't really deal with chaos well. Frankly, the market is just chaos, all the time.  One of the best investing books you can read is called A Random Walk Down Wall Street. Notice the term "random."  

Within this randomness, some voices are louder than others, but all have a vested interest in the story they tell.  For example,  one of the hottest investment manager on Wall Street right now, Cathie Wood,  (it will be a different one soon enough) has said stocks are not in a bubble.  She said, if there is a bubble, it is in fixed income, meaning bonds.

Huh!  Imagine that.  A stock picker saying the other side is in a bubble.  Meanwhile, bond fund managers are notoriously bearish, always pointing to valuations or something catastrophic for stocks. Why? Because if people sell their stocks they typically go to bonds.  They have an vested interest in the narrative they spread.

You see the game? No one is unbiased.  Everyone tells a story that ultimately benefits them. They probably believe it. I am not suggesting malfeasance. I am just acknowledging that we all adopt narratives that make sense to us and validate our own viewpoint.  It is an extraordinary person that can hear and accept a narrative outside their own experience and vantage point.  

We gravitate to narratives that closely align with our own.  That is natural, but given enough humility, we must admit we could be wrong and that is real pressure when it comes to managing your hard earned (and only) wealth you have.  

My one reader, may think I am dodging the question.  I am not, I am just framing it differently.  Are stocks over valued?  Sure, some of them. Others not so much. 

Are some stocks primed to fall? Absolutely, but others are primed to "go to the moon."  Do I know which will defy the gravitational pull of valuation?  No!

Do I know when more stocks will fall than rise?  I do not.  I don't even try.  To try and time this stuff is foolish.  

Markets go up and go down.  That is the natural order of things. Same is true for inflation. 

The key to success is to know what you are trying to accomplish, have an investment plan in place and stick to it. As the reddit users like to say, have diamond hands. 

Opt out of the short term games and noise.  You can't win that game.  

Diversify, rebalance, and turn off the notifications, tune out the sensationalism.  This is not about making the most money. It is not about the dopamine your mind produces when playing the game. It is about managing the money you have for long term success. 

You can have enough.  Be satisfied with that and enjoy your life.  We would be honored to help you define what enough is and make sure you focus on the thing that matter most. I can assure you though, that what the market will do next week, is not one of those things.