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The third part of our article could be called “Sneaky markets”. Today we are going to talk about them. What is their sneakiness? And why do “smart money” take profits away from the average investor time after time.
S&P 500
A brief review of the previous series. In our opinion, there is no bubble yet in the S&P 500 market, with P/E ratio =40 (with historical average P/E =16). As one should pay attention not to average P/E but to bond yields. Which are alternatives to equity investments. And which show yields well below the historical average of around 0%-1.5%.
The fact is that smart money is always ahead of the curve. And that’s not just a claim. It has a rigorous proof base.
For example, take a typical bear market. More often than not, it starts when the economy starts to fall. The statistics for the last 120 years, beginning in 1900, are very telling. According to it, on average bear markets have shown their lows six months before the economy begins to rise.
So, let us imagine the situation. The economy is going down, markets are going down, wages are going down, unemployment is going up, the press and television are full of negativity. At the same time, at a certain point, stocks start to rise. So, with all this negativity, supply exceeds demand. Average investors continue to sell shares at the bottom of the market, thinking that things will get worse. And the smart money buys those stocks.
Six months later, the economy starts to pick up. Investors rush to buy shares again. But suddenly it turns out that they have already risen an average of 15%-30% from their lows.
The same thing happens at the end of major bull markets
The economy is growing (in this situation, starting to recover from the pandemic), there is a lot of money in the market, and the stock market is growing. Average investors are buying more and more stocks. But, at some point in time, despite everything looking good, the “smart money” starts buying bonds and selling stocks at the very peaks to average investors.
That’s how it was 100 years ago, that’s how it is now and that’s how it will be 100 years from now. The “smart money” will always play ahead. And no indicators, talking heads on TV or various gurus taking money for seminars will help you to be “better than the market”. Unless you start thinking for yourself, the way the “smart money” thinks.
14.30 US Federal Reserve Bank of Chicago National Activity Index for January
14.45 Address by ECB Governor Christine Lagarde
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