Old news now, but for the thread record DJIA dropped 272 to 16,719 yesterday, and today is down a trivial 6 after an hour of trading.
NOW it gets interesting, because a lot of people will be tempted, thinking these prices represent a good level at which to get into an index fund.
The world's a smaller place than it used to be, there is less that is new, and there are less places to hide, and to retreat to, sort of. That is a simplified way of describing a great many factors that have been, and continue to be, responsible for the various historical rates of market growth we have seen since, say, the fall of the Berlin Wall.
IMO the recent growth in valuations has been driven in significant measure by a flight to quality. Guess what? There is nowhere left for the best money to go, and the quality isn't all it used to be--yields are down, margin is huge, first-world consumers are getting chiseled and cheap, and credit is getting tighter for the everyman, unless it's a first residential mortgage, and even then.
Sure stuff went down in the dot-com crash, but remember the performance in the preceding 5 years? The ensuing 3-year lull wasn't as devastating as all that, and in the 4th year the gain was back up over 25%. Then markets got crappy and fluctuated until 2008, after which returns were only OK until 2013, when they soared. Unlike 2003, they weren't making up for lost time. It wasn't the same investors getting re-balanced, it was new investors hugely growing the pool.
That's still happening, which tells me that the real rate of intrinsic growth is miniscule or negative, unless US producers are hugely gaining market share--which they may be in certain sectors, but are not across the board.
I therefore see 2013 as anomalous, and temporary, and begging an adjustment. There is a new normal and I think the markets may likely retain the 2013 gains, but I don't think there is any really good reason to go much higher--again, I was thinking something like 3-4% through the end of Q3 2014, and after that not easily predictable due to instabilities.
And again, it's not even intrinsic value that is important, it is value that is able to be realized. It is easy for a company that has a $1B intrinsic value to be valued at less than that when the value of its stock is totaled. There are many obvious reasons for this when you consider how investors actually operate in the market.
So how low will it go before things are reasonably valued, taking everything into account? That depends on things like how highly people are leveraged, and what the costs are of borrowing. Super-low interest rates and fed buying have been to some extent floating the market, but the critical question is to what extent.
That, precisely, I don't know. Nobody does, we all have our guesses. What I believe is that if a 30% drop in 08 must be considered anomalous and is ascribed to some particular dynamic, then it is reasonable to consider a 30% gain in 13 as similarly anomalous, and it is reasonable to ascribe it to some other particular dynamic.
Things are definitely starting to smell sweeter. DJIA now reversed direction and is up a trivial 3 on the day. I'm sure people will be buying certain stocks, but not necessarily across the board. I still see significant bifurcation happening. Fortunately, large ego acts to counter the effects of group-think, which will tend to mitigate the effect, but you will see in the markets what you see in the rest of life: the sphere of creativity and individual thinking shrinking, constrained to every-smaller pools, like the guy who wears an orange tie instead of a lime green tie thinking that he's really something else, really outside the box.
Today, at this level, it will be interesting to see what people believe is worth buying.