Adopt Stock Market’s Optimism

Watch Wall Street’s attitude and actions to understand this market. All those stock market warnings miss Wall Street’s key understanding: The civilized world is trading in its 2020 hard times for 2021 opportunities. Times may feel troubled and uncertain, but the improving trend is clear.

Disclosure: Author is fully invested in stocks and stock funds

Today’s many observers’ warnings mistakenly use healthy developments as support for concern. They see the signs as inconsistent with today’s political and pandemic angst. Therefore, their reasoning goes, investors are over-exuberant and prices are over-extended.

Here is a list of the signs, along with the parenthetical healthy conclusions.

• The banking system has “excess” deposits (available for future lending)
• Inflation is starting to rise (from its low level)
• Multiple IPOs (are successful raising capital for new and established businesses)
• Corporate bankruptcies (provide an unemotional process for restructuring or dismantling troubled businesses)
• Enormous U.S. Government borrowing and Federal Reserve money issuance (help fill the economic holes created by the temporary pandemic business restrictions)
• Bitcoin/cryptocurrency rise is a bubble (that is restricted to an item with limited supply, like gold, and is not a sign of a widespread investing attitude)
• Many “newbies” are trading stocks now (thereby establishing a new generation of experienced investors)

“But aren’t stock valuations very high?”

Stock valuations are just fine for this market. The stocks cited as overpriced are of two types:

First, companies offering the potential for high growth (not necessarily in earnings at first). Analysts of such companies often use various growth measures because a well-managed firm with a successfully developed product/service can produce sales growth, expanding brand recognition and -finally- earnings growth. That success gives access to expansion and capital investment opportunities that can produce follow-on growth.

Second, companies suffering a temporary stall or reversal. Particularly when Wall Street anticipates better times ahead, such stocks can rise, giving the appearance of ever-greater overvaluation. Then, when the better times arrive, the company results improve and valuations begin to moderate, even as the stock rises further. This “overvalued” shift often occurs when a recession nears its end – like now.

From the January 16 Bloomberg article, “A ‘Very Young’ Bull Market in Stocks Is Still Minting Believers.” (Underlining is mine)

“Warnings that the market is ripe for a crash are getting louder as a 10-month, 70% rally has pushed the S&P 500’s price-earnings ratio to levels not seen since the dot-com era.

“And while predicting the turning point is impossible, the study by JPMorgan suggests the end of…