Perspective on
Market High Fears

Now that markets have bounced back and the S&P 500 Index has crossed another significant threshold (3,000 points), the financial media is, once again, doing what it does best: subtly distorting facts to perpetuate a well-crafted narrative in order to create doubt and unrest so you will continue to tune in.

As we have discussed on numerous occasions, being a successful long-term investor at this critical stage in your life is not easy.  Understanding markets and history is certainly part of the job.  However, proactively filtering and putting the daily deluge of misinformation into proper perspective is of equal or greater importance to your success because of its impact on your mindset and potential actions.

Here are two very important examples we are hearing over and over right now that you have to be aware of:

1)“The market is at an all-time high: How many times have you seen this in the news, or heard it from friends or colleagues? In nominal terms, i.e. 3,000 points vs. 2,500 points, etc., it is true. However, like any financial number, the nominal figure itself  is of zero significance or value to you unless it’s compared with one or many other numbers for perspective.

As I shared with you in my book, The Relaxing Retirement Formula, in October of 1987, the Dow Jones Industrial average fell 508 points in one day.  Back then, 508 points represented a 22.6% drop, a very significant number!

Today, 508 points represents only a 1.8% drop which is Twelve and a Half Times LESS significant than a 22.6% drop.

However, the financial media continues to report “points” on the news each day.  Why do they do this instead using percentages which would be a far more accurate way to report the true significance of the drop?

You and I both know why intellectually: reporting points has a much larger impact on you emotionally!  And, the more emotion they can stir up, the more likely you are to tune in and remain tuned in for the next dose, thus increasing their ratings and the amount they can charge their advertisers.

Now, let’s go back to the market’s at an all-time highfear messaging and place it in proper perspective by comparing it to another relevant number.  The S&P 500 Index (as I write this) is at 3,085.  The consensus forward 12-month earnings estimate for the S&P 500 is 176 (per Yardeni).  Dividing this earnings estimate by the market price provides us with a 12-month P/E (Price-to-Earnings) estimate of 17.5.

For perspective, at the peak of the dot com bubble back in 2000, the 12-month forward P/E estimate of the S&P 500 Index was 29.0 (i.e. 66% higher than it is today)!

By any rational evaluation, that was an all-time high, and it doesn’t even take into consideration two other crucial variables as a backdrop to current market valuations, i.e. our current historically low inflation and interest rates.

The bottom line is the nominal figure of the market’s price (i.e. 3,000) is irrelevant without placing it into proper perspective.  However, the media will continue to tout the phrase, “the market’s at an all-time high” because it stirs up the fearful emotion they want to instill in you that the shoe is about to fall at any moment…so stay tuned.

2)  “The longest bull market of all time”:  The corollary to my first example is the continued storyline that we’re experiencing the longest uninterrupted bull market run of all time dating back to the financial crisis when the market bottomed out on March 9, 2009 after a 57% peak-to-trough drop.

To continue that narrative, the financial media has strategically chosen not to acknowledge two significant events.

You may recall that in 2011, we experienced a bear market brought on by the Eurozone meltdown, the debt ceiling crisis, and Standard & Poor’s downgrade of U.S. government debt.

(For reference, the pure definition of a “bear” market is a peak-to-trough fall in market prices of 20% on a closing basis, i.e. not intra-day.)

Between April 29th and October 2nd of 2011, market prices fell 19.4% on a closing basis, just shy of the 20% threshold. Although it didn’t close down 20%, if you measure the fall by the level of hysteria and equity fund redemptions, it certainly would have qualified as a bear market.

The same holds true for last year between September 20th and Christmas Eve when the value of the S&P 500 Index fell 19.8% on a closing basis, again just a hair shy of the 20% bear market threshold.

Ask all of those who panicked and sold out over $100 billion of equity mutual funds in just a two week period in December if they thought it was a bear market.

The financial media’s decision not to acknowledge these two large market downturns as “bear” markets allows them to strategically continue calling this the “longest running bull market of all time”, thus perpetuating the emotionally charged underlying fear that the market is long overdue for a large correction and it will do so at any moment.

None of this is in any way a prediction of what markets will do tomorrow, next week, or even next year.  Any honest person will readily admit that they don’t know either.

What’s so important to take away from this is to begin each day consciously aware of all attempts to strategically manipulate your emotions.  Don’t just take everything you read and hear at face value.  Always try to put it into proper perspective.

Protect your confidence by filtering all dispensed information for the truth so that you can make decisions based on fact instead of opinion.