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Tuesday, May 26, 2015
Black Monday happened in 1987, the year before I went to college...
The stock market fell 23% in one day. It was the worst one-day fall in stock market history.
"Overvaluation" was one of the causes, according to my finance professors at the University of Florida.
Today, stocks are about as expensive as they were on Black Monday in 1987...
Is it time to be afraid the next Black Monday might be around the corner? Is it time to batten down the hatches?
If you'd asked me when I was in college, I would have said, "yes." Today – after a few decades of experience – I say, "no."
Let me explain, starting back in college...
From 1900 through 1987, stocks had traded at an average of 13 times earnings. But stocks were trading near 20 times earnings at the peak in 1987 – nearly 50% more expensive than average. One lesson from Black Monday was, don't buy stocks when they're expensive.
But was that the right lesson to learn?
When I started out in in the 1990s, the stock market was never "cheap." It never traded below average (below 13 times earnings).
Stocks were always "expensive" in the 1990s, based on the old yardsticks. However, stocks performed incredibly well through the 1990s – it was one of the greatest decades in stock market history.
If you'd never bought stocks in the 1990s because you thought they were expensive, you would have missed out on some of the greatest wealth creation in stock market history.
I learned two important lessons from the 1990s stock market boom...
1) Overvaluation alone doesn't kill a stock market boom.
Overvaluation is a bit like obesity... Obesity by itself won't kill you. Of course, it's a sign that you're unhealthy, and that you probably won't live as long as a regular guy. But being above average in weight doesn't mean you'll die tomorrow... You have a higher risk, of course... But the actual day of reckoning is unknowable.
Another thing I learned is this:
2) Age alone doesn't kill a stock market boom.
In markets, and in life, there's a difference between growing older and aging... The boom of the 1990s grew older in years – but somehow it aged gracefully (until the dot-com boom arrived). Because it aged gracefully, it lived more years than any boom before it.
In my opinion, the stock market boom that we're in today falls into the same category as the 1990s boom... The current boom has grown older in years, but it has aged pretty darn gracefully...
What I mean is, we don't yet see the classic warning signs that are typical before the end of a stock market boom.
So it is true, we can't call stocks cheap anymore... And it is true that this stock market boom has lasted for many years.
It's fair to call this current stock market boom FAT and OLD at this point. Typically, those aren't good things – but they don't mean the boom will end soon.
Age and overvaluation don't kill stock market booms. I am not battening down the hatches, waiting on the next Black Monday.
I am staying in stocks... The current stock market boom has aged gracefully... and in my opinion, has a lot more life left in it...
P.S. While I don't recommend selling U.S. stocks, they aren't my No. 1 idea today. In my latest presentation, I explain exactly why the U.S. dollar is in trouble and the best place to invest right now. Learn all the details here.
Steve recently alerted readers to two opportunities outside of U.S. stocks. You can find those essays here:
Up 87% in Japan – What to Do Next
Japanese stocks have soared... But surprisingly, they can (and should) continue higher...
It's Time to Back Up the Truck and Buy Emerging Markets
We're up 18% since March in emerging markets... and the gains could be just getting started...
NEW HIGHS OF NOTE LAST WEEK
JPMorgan Chase (JPM)... investment bank
Goldman Sachs (GS)... investment bank
Blackstone Group (BX)... private equity
Wells Fargo (WFC)... America's largest bank
Aetna (AET)... insurance
Bristol-Myers Squibb (BMY)... Big Pharma
McKesson (MCK)... drug supplier
Regeneron Pharmaceuticals (REGN)... biotech
DirecTV (DTV)... satellite TV
Time Warner Cable (TWC)... cable TV
Netflix (NFLX)... home entertainment
McDonald's (MCD)... fast food
Wendy's (WEN)... fast food
Yum Brands (YUM)... Taco Bell, KFC, etc.
Honeywell International (HON)... U.S. manufacturing
E-Trade (ETFC)... online broker
Visa (V)... credit cards
Global Payments (GPN)... electronic payments
T-Mobile (TMUS)... cell phone carrier
Palo Alto Networks (PANW)... cyber security
NetEase (NTES)... Chinese internet
Activision Blizzard (ATVI)... video games
Electronic Arts (EA)... video games
Sony (SNE)... electronics
Foot Locker (FL)... shoes
Goodyear Tire & Rubber (GT)... tires
Sherwin-Williams (SHW)... paint
Lorillard (LO)... cigarettes
J.M. Smucker (SJM)... jelly
McCormick (MKC)... spices
WhiteWave Foods (WWAV)... organic food
Sotheby's (BID)... art dealer
NEW LOWS OF NOTE LAST WEEK
Not many... It's a bull market!