It is so easy to get bedazzled by the myriad of stock market indicators:
- The Fed
- China Trade
- Earnings Season
- And on, and on…
Yet, it t dawned on me this week that it is so much easier than all that. In reality there is just 1 simple equation that correctly tells you the future of the stock market. And that same equation was there at the darkest hour of the summer China Trade war fears leading to an impressive bounce for stocks.
And it emerged in Q1-2016 when economic data pointed to a recession and stocks had a nearly 20% correction. Yet there again this singular equation came to the rescue of investors with a hearty bounce to follow.
Don’t get me wrong. In the short run, stocks can decline at any time for any reason. So this equation is about finding the primary long term trend for stocks and staying focused on that (instead of trying to time every little ripple which is a “fool’s errand”).
I will spell it all out for you below along with my recommended trading strategy to squeeze the most from the current market environment.
Dividend Yield on the S&P 500 > 10 Year Treasury Rate = Buy Stocks
This equation has turned favorable again given the recent decline of Treasury rates to their current level of 1.68%. This makes the 1.76% dividend yield on the S&P 500 look quite attractive by comparison helping to put a floor under stock prices preventing bigger declines.
I know. It seems too simple. Why should this matter so much?
Now picture large money managers. The Warren Buffet types with billions of dollars to invest and a world of patience to see things through no matter of short term volatility.
So the main choices before them are cash, bonds and stocks.
Cash is trash in a low rate environment.
10 year bonds now pay only 1.68%. Which is historically low and quite risky that rates go up from here and thus the only way to insure that meager 1.68% return is to hold on til maturity. That illiquidity is also very unattractive.
Turning to stocks you would get a slightly better 1.76% dividend yield. So you are already ahead of the Treasury rate. Plus over the next 10 years it is pretty safe to assume that you will get at least a 3-5% annual appreciation on the stock prices. And that outlook includes the great likelihood of 1 bear market over that ten year stretch.
This is a slam dunk win for stocks! Which is why it is so easy to remain bullish at this time regardless of what headline or economic data comes next.
Recommended Trading Strategy
If I wrote this commentary a week ago everyone would be like “Duh Reity…we know it’s a bull market given the 12% gain in stocks the past few months.”
But the negative action this week because of the growing concerns about the Coronavirus escaping beyond China’s boarders is really the first shot across the bow for stocks in a long time. And quite likely, given how far we have run so fast, I imagine this is a convenient excuse for investors to take some profit and risk off the table.
I admit to doing the same. My Reitmeister Total Return portfolio is down from 100% long to 73.5% at this time.
That is not bearish my any stretch. But it is a statement that I would rather keep a little bit out of the market for a likely consolidation period or minor pullback to occur. Soon enough I will put that cash to work in new stocks for the next leg higher. An yes, the thing that gives me GREAT confidence in that next leg higher is the aforementioned equation making the flow of money to stocks such a near certainty.
Your next step should be to build a radar screen of attractive stocks to buy in coming weeks. These recent commentaries on StockNews.com will get you pointed in the right direction:
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network
SPY shares fell $0.27 (-0.08%) in after-hours trading Friday. Year-to-date, SPY has gained 2.13%, versus a 2.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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