Long Term vs. Short Term Investing
The attractiveness of the stock market at this moment has a lot to do with each participant's investment time horizon. Let me show you what I mean.
Long Term Investors: Right now "cash is trash!" That's because investors are getting
almost no income from interest bearing accounts. Which leads many to turn to Treasury bonds for some kind of return. Even with the recent downgrade, demand is extremely high for these safe haven investments. As such, rates on the 10 Year Treasury is down to a measly 2.1%. Now compare that to the dividend yield on the S&P 500 at about 2% or the Dow stocks at 2.8%. For the truly long term investor you can appreciate the appeal of stocks right now just from the dividend standpoint alone. Then if you toss in, even the most modest, potential return for capital appreciation over the next 10 years, then you can understand why some folks like Warren Buffett and Donald Trump are snapping up stocks with both hands.
Short Term Investors: A recession normally lowers profits by 15-20% from the peak. Plus the PE usually contracts to 10-12 (as opposed to the standard 14-15) as people become risk adverse and won't pay as much for each dollar of earnings. If that held up this time around we would see S&P 500 company earnings down from the current $95 EPS to $75-80. Tack on the likely contraction in PE gets us to an S&P 500 range of 750 to 960. Yes, that's a pretty wide range. But even the best case scenario would still represent a nearly 20% drop from Monday's close. For this very reason is why most short term traders are betting on more downside.
Neither view is wrong. It's just a matter of what investing time horizon suits you. Those with patience and perseverance will do quite well in snapping up quality dividend paying stocks for attractive long run returns. Those with the stomach to ride all the short term volatility will do well timing out the major moves as we go from Overbought to Oversold (rinse and repeat).
Do a little soul searching today on this subject and then have the conviction to see that strategy through.
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