I’ve written before about ways to protect yourself against – and even profit from – a market crash.
You can do that by moving some of your assets to cash… by buying put options on market indexes… or even by investing in exchange-traded funds that protect you against black swan events.
(I’ve done all of these at one time or another.)
My emphasis on protecting my portfolio reflects the advice I learned from global investor Jim Rogers…
“Always look down before you look up.”
Put another way…
Focus on not losing money, and the upside will take care of itself.
This may make me sound more cautious – or even pessimistic – than I really am.
Just to be clear… I’m a long-term stock market bull.
I am long the U.S. stock market in my own portfolio, and I’ve advised folks to do the same (even if the likes of Goldman Sachs and Citibank are calling a market top).
Like Austrian economist Friedrich Hayek, I believe market prices reflect the collective wisdom of market participants.
Sure, this may not be true for an individual stock, which may be either massively undervalued or driven higher by a sexy story.
But today I want to share with you one of the most important broad market indicators…
And why it’s giving me the go-ahead to stay long and strong on the U.S. stock market.
The Valuation Puzzle
The first thing you look at when you invest in a stock market is valuation.
That’s because stock markets tend to crash when they get expensive…
And eventually rise when they are cheap.
Right now, different measures of U.S. stock market valuations are giving conflicting signals.
One of the best-known measures is signaling danger…
Even as another, lesser-known one is signaling all clear…
Let’s take a look at each…
I’ve written before about the cyclically adjusted price-to-earnings (CAPE) ratio.
Popularized by Yale professor and Nobel Laureate Robert Shiller, the CAPE ratio is a valuation measure that uses real earnings per share (EPS) over a 10-year period. This normalizes corporate profit fluctuations over different periods of a business cycle.
Think of the CAPE as a long-term price-to-earnings (P/E) ratio.
As of this writing, the S&P 500’s CAPE ratio is bad news for U.S. stock market investors.
It stands at an eye-popping 33.6.
That’s higher than it was before Black Monday, the stock market crash of 1987…
And the highest it’s been since the dot-com crash of 2000.
Today, I want to share another valuation measure with you…
One that offers a very different view of the U.S. stock market.
This valuation measure excludes the impact of technology – the sector that has been a significant driver of U.S. stock market returns.
James Ferguson of U.K.-based research firm MacroStrategy has calculated that if you strip out the tech sector and Amazon, the forward P/E for the rest of the S&P 500 index falls to just 14.4.
(The U.S. tech sector accounts for 26% of the S&P 500. Amazon has a market cap of $963 billion and a forward P/E of 156.)
By way of comparison, the forward P/E for the crisis-ridden MSCI Emerging Markets Index is about 13.
Given the S&P 500 offers more stability than an emerging market index, it’s easy to see why investors prefer the safety of the U.S. stock market to a roll of the dice in China, Turkey or Russia. This provides a powerful takeaway…
Once you drill down into the numbers, you find much of the U.S. stock market is downright cheap.
That’s why I’m betting U.S. stocks continue to rise – boosted, as I’ve written, by strong seasonality between now and the end of April.
Yes, you should “look down before you look up”… and have a plan in place for a possible market downturn.
But in the meantime, ignore the negative headlines and strike while the iron is hot…
Invest in U.S. stocks now.