The stock market isn’t just about how much money the Federal Reserve is printing. US earnings season is less than three weeks away. And expectations aren’t pretty, reports our sister publication in the US, the 5 Minute Forecast. This charts shows how the forecast earnings have been tumbling while stocks have been getting more expensive relative to those earnings:
In the end, shares are worth what a company is worth. And that’s determined by profits, among other things of course. If profits fall, but stocks are getting more expensive, something has to give.
The question is whether profits will surge or stock prices will fall. A poor earnings season could delay Dectaper even further.
‘Nick Hubble & some others seem to take a very simplistic & naive view of the share market. As if all the retirees are just going to sell all their shares, all at once in unison. Bit like economists who have all been taught from the same text books at uni where every component acts in a singular rational way. Life is not like that except when you are young, lacking experience. It may come as a surprise to Nick to learn that shares can actually provide an income merely from nice franking credits & I think most common sense analysts would agree. The world will go on with ups & downs but with luck we’ll all survive & prosper. M.M.’
Well, we may be young. But we’re not naive about the importance of income investments to your portfolio’s long-term success. Our very first issue of The Money for Life Letter was about how to add a compounding effect to dividend paying shares using a tactic few dividend investors know about.
But, more importantly, our argument yesterday was that the tide is going to change. In a few years, we’ll reach high tide on the direction of retirement savings. As the population ages, more and more people will begin selling their assets to pay for day to day expenses in retirement, instead of buying assets in preparation for retirement. Cash will flow out of investment markets on a net basis, adding supply and reducing demand. That means lower prices.
If you want to keep swimming against the tide once it changes direction, stick to growth companies and their capital gains. Good luck to you. You’ll find The Money for Life Letter subscribers doing what M.M. suggested above. Earning dividend income.
The crucial thing to understand is something called first mover advantage. If people realise that retirees will be selling up in droves, they will want out. The first person to escape the stock market’s growth stocks will get the best price. That’s why there may be a sudden rush.
for The Daily Reckoning Australia
From the Archives…
Emerging Markets Walk The Tapertalk
6-09-2013 – Nick Hubble
House Prices Halve Without a Recession
5-09-2013 – Nick Hubble
A Manufacturing Industry Revolution
4-09-2013 – Nick Hubble
How the RBA is Using Low Interest Rates to Destroy Your Wealth
3-09-2013 – Nick Hubble
Is the Stock Market Predicting War?
2-09-2013 – Nick Hubble