From Birch Gold Group
Record highs are giving Wall Street an excuse to pop open the champagne, but economists say we should curb our enthusiasm.
On January 25, the Dow Jones Industrial Average broke 20,000 points for the first time in history. Traders are celebrating and financial media is buzzing with speculation that 25,000 could be just around the corner. But history and fundamental research say otherwise.
Here’s why…
1. Stocks are painfully overvalued
As we discussed last week, the price-to-earnings and price-to-sales ratios of U.S. stocks are at their highest since 1999.
Why is that significant? For starters, when stocks reached their valuation ceiling after 1999, the market tumbled for two straight years and shed over $5 trillion. The resulting tech-bubble crash became one of the biggest U.S. market nosedives ever.
Now, it seems we’re approaching that point yet again. Granted, conditions are different today than they were in 1999, but there’s no guarantee this valuation bubble won’t pop just as abruptly as the last.
2. Previous Dow milestones preceded major drops
If we take a step back and consider what occurred after some of the Dow’s other milestones, we instantly see reasons to be skeptical of last month’s 20,000 point record.
When the Dow broke 1,000 in 1972, it instantly froze, faltered, and proceeded to take 15 years to reach 2,000. But that looks like a cakewalk compared to what happened next.
Eight short months after surpassing 2,000 points in January, 1987, the Dow plummeted along with the rest of the U.S. stock market on Black Monday, one of the worst crashes in history.
Then in 1999, the Dow broke 10,000 only to be decimated in the tech-bubble crash of 2000.
Do you see a pattern developing?
3. This rally has been fueled by emotion instead of reason
Market bubbles come about when the influence of human nature overtakes that of reason. Take the tulip craze of 1637, for example.
When Holland’s upper-class adopted tulip bulbs as a status symbol, they evolved from a commodity to a trading asset. Suddenly, bulb prices were based not on what the bulbs themselves were worth, but what a buyer in the market was willing to pay for them. Before long, anyone with the means was putting money into the bulb market.
As more people entered the market, prices rose drastically. Speculation increased, encouraging even more people to enter the market and pushing prices even higher.
Every person who bought bulbs at these insanely overvalued prices was a fool, but that didn’t matter to them. All they cared about was finding a “greater fool” willing to buy their bulbs later at a higher price.
As you’ve probably guessed, the tulip craze eventually ran out of fools. Hysterical selling came shortly after, and prices hit rock bottom to reflect reality, i.e. what the bulbs were actually worth.
What This Means for Today’s Stock Market
Essentially, traders are doing the same thing with stocks today that the Dutch were doing with bulbs back in 1637: buying based on hype instead of value. It’s one of the few logical explanations for why stock prices are breaking records while the value of stocks themselves is abysmal.
Considering the facts, the Dow’s new record should serve as a warning. If you’re holding even the “safest” of traditional investments without protecting your savings with gold, you may want to reevaluate your strategy.
Birch Gold Group helps Americans protect their savings with physical gold and silver. Clients can purchase precious metals for physical possession, or move their IRA or 401(k) into a Precious Metals IRA. To learn more, request a free Info Kit on Gold – there is zero cost and zero obligation to you. All you need to do is enter your details at www.birchgold.com
Sell when they are popping champagne corks and buy when there is blood in the streets ! Remember it is very difficult to catch a fallling knife , let someone else make that last 5 or 10 % take your profit pay your taxes and move on ! The bigger idiot theory is always at work in the stock market and now you are up against flash trading that can shift in millaseconds ! You cannot eat gold or silver
stocks are just electronic blips in computer memories. not much to eat there.
I’ve been eating the Kruggerands I sold four years ago……
See today’s TBP Post “Rare Honesty From A Corporate CEO”
“You cannot eat gold or silver”
No you cant.
But you can trade it for food and basic necessities with anyone in the world, – because it is universally accepted as “money” wherever you go.
History teaches us that when fiat dies, the “common” people go back to the only thing that serves as “money”. That would be gold and silver.
Gold and silver are no one’s (think government) proxy.
PM’s are the ultimate extinguisher of debt.
”Its different this time” lol
In general terms, look for the market to go up somewhat more, correct about 50%, and resume a powerful bull market.
In S&P terms, up to about 2400, drop 900, and resume upward from the 1500 – 1600 level.
For those who may be thinking that 50% of 2400 is 1200 rather than 900, please remember that this latest, long leg of the market (called a wave in some circles) started with the S&P low in the 600s in March, 2009 . So 2400 – 600 = 1800 – 50% = 900.
The most important message here is that this would be part of a continuing trend, and not the start of a new trend. Collapse, etc. is not on the horizon, barring a catastrophe from mother nature or spontaneous insanity. Have a nice decade!