Using any valuation metrics, the current stock market appears over the top, as of 12/16/2016. Dow Jones Industrial Average, flirting with 20,000, has been up 8.7% since the election night 40 days ago. The S&P 500 has a current PE of 26 and Shiller’s PE is 27.9. Though, the forward PE is at 18.4, closer to the 50-year historical average between 15 and 16.
Admit or not, more and more people start having the familiar sick feeling in their stomach just like last few times right before the 2000 tech bubble and 2008 housing bubble burst. The irony of a bubble is that everyone in it knows it is a bubble, yet, the bubble is technically not a bubble unless it bursts. We all want to ride it through and think we are the only one who can get out before others. The further evidence of a bubble is that the market has been up 38 of the last 40 days after the election.
It seems futile to rationalize after the fact why the market has gone up so much so fast. The stock market has gone up more than 10% while 10-year Treasury interest rates went from 1.85% to 2.63% for the 40 days after the election. Anybody with common sense should realize that the notion a rising interest rate along with a rising stock market is fundamentally flawed. It cannot last.
Look like the campaign rhetoric lingers on into presidential promises. And this time, market rally on the politicians’ promises. The current market has more than priced in both the popular and unpopular promises. The good news is that the market historically has a short memory. If the politicians fail to follow through their popular promises (such as tax decreases and deregulation), the market will not punish them by taking back the returns. But if they fail to keep the unpopular promises (such as tighter immigration, trade restrictions), the market will not give back the returns, neither.
The bad news is that the market will drop like a rock and then some if the US economy shows any signs that it will not deliver the “3.5-4.0%” annual growth in next four years.
So, the real question is not “Whether Dow will hit 20,000?” rather, “Whether Dow will stay above 20,000?”
For long-term, 401k investors, why are you even asking these questions?