Why I Wouldn't Bet My Retirement on Stocks Right Now

By Chris Weber

The easy part is nearly over.

It was pretty easy for me back in March to forecast a sharp rally in world equity markets. The nearly five months since then has been an exercise in watching this, and the building bullishness that has gone along with it.

Now it is just a question of how much farther this rally could go. It could go a long way more or it could vanish at any time: that's why I say we're coming into the hard part. What if the Dow Industrials go back and surpass their all-time highs of late 2007? Would that mean the problems would be over?

Well, the thought of that happening takes me back to my senior year in high school. It was January of 1973 and that is exactly what happened. After touching 1,000 back in 1966, the next seven years were spent in falling back, then bear market rallies that almost but did not quite get to the old highs, and then breaking down again, then rising.

There was huge bullishness in the air. I was in my senior high school biology class at that time, listening to the bullishness of one of my friends (yes, a few of us were interested in investing back then). I'd been in both currencies and precious metals for the previous two years (much like now), so I really had no opinions on what was going on in the stock market.

If I knew then what I know today, however, I would have been suspicious. In January of 1973, with the Dow well over 1,000 for the first time day after day, the Dow Transports still did not confirm by making their own records.

This "non-confirmation" under the Dow Theory forecasted trouble. And sure enough, the Dow Industrials spent the next two years in hell. In December of 1974 the Dow hit 570. Adjusted for the raging inflation back then, it had fallen in half in less than two years.

But that was finally the time when the markets bottomed, in late 1974. At that time, the values were really great. The dividend yield on the indexes was over 6%, and the P/Es were about the same level. In late 1974, depression and disgust with the stock markets was so thick you could cut it with the proverbial knife. That's the kind of markets you want to see in order to risk more than a portion of your assets in the stock market.

I think we were far from this level of depression and great values back in March. One big reason is that the values are not there. As of the end of July, the dividend yield on the S&P 500 has fallen to only 2.13%. When the rally began in March, the yield was over 3.5%. That is a huge fall in a short time.

Then, as stock prices have soared, earnings of companies have just not kept pace. In many cases, they are down sharply. This imbalance in price to earnings is shown in the weird spike in the P/E ratio on the S&P 500. It is now up to 127 times annual earnings, up from less than 20 times earnings at the rally's start in March.

In other words, the dividend yield and the P/Es were not what you see at real bottoms. In really low markets, investors are shaken so much that years are required for them to regain bullishness.

Instead, I think what we've been seeing are the types of violent rallies within bear markets we saw throughout both the 1930s and the 60s-early 70s.

So once again, I'm just watching the stock markets. My position is that if the Dow Industrials and Transports can both better their previous record highs that they reached back in the second half of 2007, then I'll be interested and ready to say that we are really off to the races again.

What I think is more likely is a repeat of the period of 1966 to 1975, where we'll see a series of rallies within a bear market. In other words, this will be an easy time to lose money, and a hard time to make it.