"...we continue to rate the probability of a bear market as essentially zero percent at this time."
Bob reiterated this belief on the April 25th show but bristled when asked about it on the following weekend (Saturday and Sunday past) leading many to think he might have changed his mind.
I ask "what has changed or could have changed in two weeks?" Do we have the makings of the start of a bear market?
Let's examine the key indicators of stock market timing models:
Economic: Inflation is near zero unless you live in Silicon Valley or greater San Francisco Bay Area where you pay for the nice weather and scenery and there are many new high paying jobs.
Forward earnings momentum is great. The Internet should drive goods and services to deflationary levels.
Sentiment: Still less than 70%. 75% or 80% and I'd be REALLY worried.
Monetary Policy: Some think the Fed might raise rates. This is possible and could be the catalyst for a correction, but it might be taken as an act of War by our Asian friends struggling to come out of their recessions. Greenspan has indicated that he now considers the World problems when setting rates. With inflation at 1% or so, the 30-yr bond should be at 5% or even 4%, not going towards 6%!
I look for rates to hold this month.
Interest rates are higher, yes, but not to a level for a bear but a correction yes.
Valuation:
This is the tricky one and has most of us worried. Brinker conservatively estimates earnings of $53 for the S&P500 in 2000 and says he feels the market will support a p/e of 25.5. This gives $1,351 on the S&P500. This is Right where we are!
I've been trying to get a handle on earnings but it seems that earnings are exceeding expectations so there could be some room on the upside. We should look at what Abby and others are estimating. If you have any numbers, please post them here at "Kirk's Market Thoughts."
Even if earnings are expected to be 10% higher than Brinker predicts, there is much risk at these levels and it seems prudent to reduce equity allocation SOME. Why risk a KNOWN 6% return in Ginnie May Funds just to get maybe 10% more this year in the market?
Also, it seems that we haven't heard about Y2K in some time. I suspect the 6 month "long term" nature of today's market to possibly use this as a catalyst for a correction. Being that it is now May... this could come any time. Many CONSERVATIVE investors are already in a reduced asset allocation until the problem passes. Reducing allocation to equities now would give you some dry powder for a Y2K correction (if it materializes - corrections are unpredictable by definition.)
