Irrational exuberance continues in 2019

Dear readers, I haven’t been posting anything for almost 2 years. In fact, I took the site down and focused more on my family and finances. During this time, I have accomplished some of my financial goals and I hope to share with you in this blog in the future.

Back in June 2017, I wrote the article ‘How to invest in 2017?’ outlining my thoughts about the stock market. At that time, S&P 500 index was at around 2400 and has been in a bull run for 8 years. I gradually trimmed my stock holdings and started to put them in cash and bond.

By the beginning of 2018, I pretty much got out of stock market completely except that I still continued to participate in ESPP purchasing and receive RSUs from my employer.

Irrational exuberance is the phrase Alan Greenspan, then-Federal Reserve Board Chairman, used in a speech given in 1990s. It means that investors are overly enthusiastic and asset price is driven to a level that is not supported by the fundamentals. The dot-com bubble didn’t burst until mid-to-late 2000. As you can see, it is hard to predict when will a bubble burst, but it will happen eventually and it could take years. I felt that the stock market was over-valued in 2017 and continue to feel the same today in 2019.

S&P 500 index continued to rise to all time high at 2940.41 in September 2018 fueled by the tax cut from President Donald Trump. The idea was to encourage job creation for the Americans. Companies benefited from lower tax rate and low cost of borrowing. Many of them instead of hiring or re-investing into their business, they ‘increase their shareholder’s value’ by stock buying back their own stock. Without growing the revenue or improving competitiveness, company can still improve the stock price by spreading the same profit over fewer number of shares.


source: tradingeconomics.com

At the same time, global economy outside of the US has already slowed significantly. China and Europe GDP growth rate continues to decline in 2018 and 2019. GDP growth in the United States follow the same trend.

US GDP growth

source: tradingeconomics.com

Starting in October 2018, US stock market went through a brutal decline of 20% and went into a bear market briefly on December 25th. The gain accumulated in the first 3 quarters of 2018 were completely wiped out.

Luckily, I was out of the stock market and wasn’t affected by the ups and downs. Instead, I focused on a couple of my financial goals. One of them was to pay down the mortgage. I am on track to be debt free in 2-3 years.

Fast forward to 2019, S&P 500 rebounded quickly. Q1 was the best quarter in 20 years. It was up by more than 13%. As of April 15th, S&P 500 index is back to 2905.58, which is slightly below its all time high. In my opinion, it is hard to justify such valuation according to historical ratio. Below is the Shiller PE 10 ratio as of 4/15/2019

Companies are about to release their first quarter earnings. Most of the analysts already lowered their expectations on revenue and earnings. It will be very interesting to see how the market will perform in the near future. For me, I am still heads down paying off my mortgages, collecting interests from bonds and liquidating any new shares acquired through ESPP or vested RSUs.

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