What was until recently an unloved bull market has now reached the point of “euphoria,” and investors are “having a hard time imagining a decline,” according to Morgan Stanley.
After all, what’s not to love about a bull market that has only two directions – up… and up faster?
It’s being called a “market melt-up,” and the main fear people now have is of missing out.
Those caught up in the euphoria – and the fear of missing out – might want to consider the following:
- The S&P 500 is trading at 2.3 times its companies’ sales – a smidgen below its dot-com peak
- Price-earnings ratios have only been higher for 1% of the stock index’s history
- The cyclically adjusted price-earnings ratio is higher than before the crash of 1929, and higher than at any moment in history except right before the dot-com crash
Those of us who experienced the pain of the dot-com meltdown in 2002 and the financial crash of 2008 hope that the market will never become that irrationally exuberant again.
Back then, people justified their exuberance with the mantra that “this time it’s different.”
And that was their downfall, because history has shown that it’s only different… until it’s not.
Have you been out to dinner at a nice restaurant since the start of the year?
Typically, in January people take a breather from spending, as they nurse their holiday spending hangover.
Not this year. Restaurants everywhere are packed.
It’s all thanks to the “wealth effect” – people are feeling wealthy, thanks to the gains in the stock market, new tax cuts for many, and paycheck increases for some.
So people spend rather than save, and they are going more into debt to do it. That’s why the savings rate is dropping and consumer debt is climbing.
Many people are woefully unprepared for the inevitable market meltdown, and it’s a recipe for disaster.
So what can you do?
Here Are 4 Tips for Being Prepared For the Next Market Meltdown:
Tip #1: Make building up your rainy-day fund a priority
Tip #2: Ignore the conventional advice of having an emergency fund of 3-6 months’ worth of expenses. During the last financial crisis, many people were out of work for 1 to 2 years, or longer. Make sure you have an amount equal to two years of expenses in safe and liquid savings to help you weather whatever challenges life throws at you
Tip #3: Don’t forget history – we’re in the second-longest-running bull market in history, and the longest-running bull markets go out “with a bang, not a whimper”
Tip #4: Avoid the very human urge to follow the crowd. As Marshall Thurber observed, “All the dogs barking up the wrong tree don’t make it the right one.”
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