4 Reasons 2018 Is The Time To Sell Your Stocks
If you’re an investor in the stock market, now is a good time to consider dumping your stocks and taking your profits home while you’re ahead. There are a variety of factors lining up that indicate the economy is going to take a downturn soon, likely even in 2018. Trading 101 teaches one to recognize the patterns of the markets, and here are some of the most worrisome ones that have been amassing for the last few years of economic prosperity.
1) We went 9 years without a correction Stock prices cannot keep going up – in fact, a 9 year period without a major market correction is excessively rare and we’re lucky to have made it this far without a crash. A decade of inflation is almost always followed by recession. There have been plenty of examples of market adjusting and correcting in this manner of the last few decades. Notable examples include the dot.com crash, the economic decline after 9/11 as well as the stock market collapses in 1988 as well as 1992, which we’re always warned about when we learn Trading 101.
The prices of stocks are reaching an all-time high and it’s only a matter of time before the market corrects itself in form of a large drop.
2) There’s been a lot of cash flowing into stocks coming from individual first time investors In the wake of the cannabis boom and cryptocurrency hype, many people found themselves with a lot of liquid cash lying around that they didn’t account for. In an effort to use the money wisely, they opened brokerage accounts and started investing in the stock market. The last week of January 2018 saw over $33 billion flow into the global stock market through a combination of mutual funds and exchange funds. An inflow of that proportion hadn’t been seen since the start of the millennium. Blockchain startups and related companies have been soaking up a lot of cash.
A lot of this capital inflow is coming from people who were too young to be negatively affected by the last two economic collapses. They were children during the dot.com collapse as well as the 2008 housing crash and thus have very little experience in economic downturns. What they’re considering as an opportunity to invest is likelier to be a ticking timebomb, especially with a lot of the investments being made having very little in terms of proven economic success.
3) The inflow of retail cash is pushing stock valuations to dangerous levels One of the economic formulas used to check whether stocks are over or undervalued is the Shiller PE ratio. Shiller is an economist from Yale and a Nobel Peace Prize Winner for his work in creating the Price/Earning ratio. The economic average for that ratio is around 17, meaning that stocks valued near optimum levels. Right now we’re looking at a ratio of 34 and above, which is twice that of that average. The highest PE ratio we had was in 1998 at around 45 before the economy collapsed and 28 around the time of the 2008 economic plunge.
4) The high P/E ratio does not justify higher levels of earning To use Shiller’s PE ratio, we need to compare it to the growth index of the economy. This metric is called PEG (Price/Earnings over Growth) which gives us a good idea of whether stocks are too expensive or to cheap. Stocks should be at an ideal even level around 1.0, which in our case is at a PE ratio of 17, the average for the economy. After doing the math you’ll arrive at a current PEG of 2.1, meaning that stocks are generally over-valued by a factor of 2.1 – so it’s a matter of time before the market adjusts. If you want to profit from your stocks, sell them as soon as they’re in the green for you and watch as the crash comes in.