Is the “Trump bump” now the “Trump dump?”
Let’s leave politics aside for a second. The reason the stock market is selling off really has nothing to do with Washington, nor is the stock market reacting to the economy.
Look, the market was overdue for a sell-off. It’s rare that stocks go for nine years without a correction, which is a decline of 10% or more (which hasn’t happened as of this writing). The economy has heated up in recent years, but it’s still pretty healthy.
Here are five fundamental reasons why stock markets are behaving badly — and why you should keep saving and investing.
— Stocks Were Pricey. There’s always a lot of debate on whether stocks are “over” or “under” valued. It’s a relative term and you need historical data to make an educated guess.
One useful gauge is the “Shiller PE Ratio,” pioneered by Nobel Prize winner Robert Shiller, a Yale economics professor and expert on behavioral economics. As I write this, Shiller’s ratio, a measure of the comparative past price level of the S&P 500 (big U.S. stocks) was at 32.
What does that number mean? On “Black Tuesday” in 1929, the ratio was at 30. At the height of the dot.com bubble in 1999, it was around 45. The average since 1885 is around 17. So relative to other market tops, you can reasonably say U.S. stocks are expensive.
But what the Shiller ratio doesn’t tell you is if stocks will drift down to the historical average or how much of a decline is likely. In any case, a stock sell-off gives you better prices on quality companies. Smart investors should grab bargains at this time.