Stocks pushed into record territory again on Tuesday as buyers and sellers rather lazily debated yet again whether or not this rally can be trusted. The specific conversations surrounded Amazon’s (AMZN) $970 million purchase of video game streaming company Twitch and Warren Buffett’s support of Burger King’s (BKW) tax inversion scheme but the conversation has been largely the same for more than half a decade.
Is the economy really improving or is the recovery a mirage fueled by an easy-money Federal Reserve and laissez faire approach towards regulation?
Much to the chagrin of those on the sidelines concerned about (hoping for?) a crash the answer seems to be that it just doesn’t matter. You have to trade the market you have, not the one that should be based on your model. Stocks are worth what someone else will pay for them. If you’ve been shooting against this market based on a different idea you’re either out of business or Marc Faber.
Of course the debate over valuation is unavoidable if you’re planning on putting money to work in the near term. No one wants to be the last person to buy a bubble and this endless game of investment chicken has undoubtedly been boosting the market along. It’s easy to forget today but from where the world stood in 2009 the economy simply staying out of collapse amounts to an upside surprise.
“I believe the market has been going up more or less because of company performance,” says Zachary Karabell of Envestnet in the attached clip. “You can argue about whether or not earnings are massaged but revenue in the second quarter was up 4.5% for the S&P 500 (^GSPC) which is considerably better than any national economy in the world, save China and possibly better than that.”
You can tack any historical multiples you want on to that narrative to decide for yourself whether or not the market is fairly valued but understand that there is a premium cost to playing Hamlet. Equities are up 8% so far in 2014 while cash is underperforming whatever inflation level you think there is and money market funds pay next to nothing. Waiting for the sky to fall like it did in 2008 or 1987 or 1929 is a lousy bet.
“We’re in a little bit of terra incognita,” surmises Karabell. “Your best bet is to be a little prudent and be in a little bit of everything.”
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