As the stock market continues to make first one high and then another (last Friday it made its eighth latest all time high in a row), you should beware the herd mentality that is driving it relentlessly and seemingly inexorably higher. President Barry James of James Advantage Fund is among the latest financial markets voices sounding the warning alarm on the inevitable correction that the historical statistics prove is bound to hit before long.
He mentioned three different crucial factors that could lead to absolute financial chaos on Wall Street. In fact, the situation surrounding the financial markets in the U.S. is so dire that he compares it to the famed super-volcano that underlies the popular Yellowstone National Park. For years now, scientists have worried that the super-volcano is nearing eruption point.
In James’ warning words:
“Even though [the market] looks beautiful— setting new highs, good momentum, and earnings have been coming in strong, [there are] things to worry about.”
Besides this, the earnings picture is painting a falsely rosy looking scenario, he warns:
“In the 18 months ending in June, we saw companies that had no earnings, they were losing money, outperform those that were making money.”
Yet it is ultimately the soaring high levels of stocks currently that poses the greatest threats to the sky-high market values. James’ own company has research that aligns all too well with that released by Goldman Sachs only last week.
“We went back to 1994 and researched team data that said [that if we look at cyclically adjusted P/E, one out of two times] the market was down in the next 12 months, and about one out of three times it was down more than 10 percent.”
Along the same rationale, Goldman warned that in the few occasions when stock values have been this high, the subsequent 10 year returns for the S&P 500 have yielded anywhere from negative to single digit returns in 99 percent of the cases. James summed it all up with a prescient warning to take action on your retirement funds which sit in the stock market today:
“It doesn’t mean that we’ll see a volcanic eruption in the immediate future, and these market peaks take a long time, but we’re definitely in the latter stages of this market advance. We’re going to see the inevitable correction, I just wish I could say I knew when.”
You ought to heed the joint warning of James Banks and investment banking legend Goldman Sachs now while there is still time to be proactive with the holdings in your retirement portfolio.
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