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A Valuation Conversation
March 15, 2024
You may have noticed the stock market rising lately. Much of the gain isn’t so much “the market” as a handful of mega-cap stocks. Nonetheless, the bulls are clearly in charge. The question is how long they will stay there. History suggests longer than many market bears think.
I expect another bear market at some point. But the timing? My personal history suggests I’m not a very reliable market timer. We will know when it gets here.
(By the way, I am not predicting a bear market. I am making an observation.)
In theory, a stock price represents the discounted current value of its estimated future earnings. You buy because you want a share of its future profits (as either dividends or a higher share price) and today’s price offers that opportunity.
But that’s theory. In reality, many people buy simply because they think the share price will keep rising as other people buy. It’s a kind of “greater fool” method that can actually work. (Market timers and technicians argue they have ways to measure this. And some succeed, at least for a time.)
As with other assets, low interest rates magnify the profit opportunity. Cheap financing helps, whether you’re buying a home or a stock. Conversely, high interest rates reduce the potential gains.
But the market is also forward looking. It responds not just to current interest rates but also to where it thinks rates are going. On that basis, the last six months or so make sense. Rates seemed to have peaked. Analysts began projecting rate...
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