Financial Market Update: Climbing the Wall of Worry

DEFINITION of “Wall Of Worry”

“The financial markets’ periodic tendency to surmount a host of negative factors and keep ascending. ‘Wall of Worry’ is generally used in connection with the stock markets, referring to their resilience when running into a temporary stumbling block, rather than a permanent impediment to a market advance.”

BREAKING DOWN “Wall Of Worry”

“While a ‘Wall of Worry may sometimes consist of a single economic, political or geopolitical issue significant enough to affect consumer and investor sentiment, it more commonly comprises concerns on numerous fronts. The markets’ ability to climb a wall of worry reflects investor confidence that these issues will be resolved at some point. However, market direction once the wall of worry has been surmounted is impossible to ascertain, and depends on the stage of the economic cycle at which it occurs.”

“Definition of ‘Wall of Worry’” and “Breaking Down ‘Wall of Worry’” courtesy of Investopedia.

This past week in the Wall Street Journal there was an article discussing the valuations of the stock market. The article discussed how it is becoming harder for investors to find value in today’s financial markets and made reference to the CAPE Ratio. In a previous article, I mentioned Robert Shiller’s CAPE Ratio (Cyclically Adjusted Price/Earnings Ratio). Today, I am finding a lot of analysis discussing the Robert Shiller report and warning investors about valuations. I have provided the Schiller report at the end of this article.

The long term mean of the CAPE ratio is 16.74, and yet on July 18, 2017, the ratio was at 30.10. At this level, we are approaching the second highest all time stock market valuation in US history. In 1929 the stock market reached higher than 32 on the CAPE ratio for two months. During the “tech bubble” of 1999, the CAPE ratio went higher than 40 for a few months. I remember when I managed money for a large brokerage firm in 2000, and the constant message I received was “valuations don’t matter”, implying that history wasn’t a good gauge when looking at stock prices and historical valuations.

History typically repeats itself in a matter of time. I currently do not see any sort of catalyst to drive stocks lower, however, every “new record” on the Dow, without earnings, creates a more expensive stock market. Earnings have shown some signs of improving, so the next few quarters will be very interesting for stock investors. In my April financial market update, I indicated that the DOW could reach as high as 21,500; it has gone slightly above that in July. There are a lot of analysts talking about corrections and worries in the financial press. I believe we are experiencing a good example of stocks “climbing the wall of worry”.

With the lessons learned from the 2000-2002 and 2007-2009 stock markets, investors should continue to look for investments that are not too over valued and other investment vehicles that can help achieve goals. When will the market have its next 20% correction? No one can accurately answer that question, though many try day in and day out. I have found through my own 25 years of research that forecasting markets is not wise. But, looking at history is! Although we do not see anything that concerns us in the near future, history has proven that the periods of time with a CAPE Ratio over 30 are typically followed by poor investment results two to three years later.

Indie Asset Partners is always available to answer your questions about the financial markets. Send us an email or give us a call at 317-428.6600.

Shiller PE Ratio

Current Shiller PE Ratio: 30.23 -0.05 (-0.16%)

9:44 am EDT, Fri Jul 28

Shiller PE ratio for the S&P 500.

Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10 — FAQ.

Data courtesy of Robert Shiller from his book, Irrational Exuberance .