What Would William Wallace Do with this Market?

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I’m a big movie fan, so I can recall many famous scenes at a moment’s notice. But one that’s at the top of my all-time favorite list comes from “Braveheart.”

The 1995 film stars Mel Gibson, and chronicles the life of the Scottish freedom fighter William Wallace (loosely and with historical inaccuracies, I should add!) And the particular scene I’m referencing comes when Wallace’s forces are about to fight the English at the Battle of Stirling Bridge.

First, the English cavalry charges his foot soldiers, who get more and more nervous as the horses thunder toward them.

But rather than panic, Wallace implores them to stand fast, saying “Hold … HOLD … HOLD!!!”

Then, at the last second, he gives the urgent signal to act. The soldiers grab a bunch of sharpened spears they were hiding … they point them at the horsemen … and the attackers crash upon them, dying in droves. Wallace’s forces go on to win the battle.

The lesson? Success is all about timing! Had the defenders revealed their spears too soon, the cavalry would have stopped charging, and the strategy would have failed. Had they acted too late, they would have been mowed down.

I’d argue the same lesson applies to this stock market. You see, I’ve lost count of the number of articles that share two common bearish theses: 1) Stocks are expensive and 2) The rally is long in the tooth.

Those notions are technically correct. If you follow the work of Nobel Laureate economist and Yale University professor Robert Shiller, you’ve probably heard of his cyclically adjusted price-to-earnings ratio. We don’t need to get too deep in the weeds here. But suffice it to say his “CAPE” ratio is designed to show whether the market is overvalued and likely to deliver weak returns over the next several years … or undervalued and likely to deliver strong ones.

At just over 33, the ratio is roughly double its long-term average of 16.8. It’s also higher than it was in 1929 right before the market crashed – and closing in on the all-time high reached at the peak of the dot-com mania.

Meanwhile, the bull market which began in March 2009 is now the longest for the S&P 500 since 1928. The only exception is the period from October 1990-March 2000 run.

But you know what? Valuation is a lousy timing tool. Stocks can go from somewhat overvalued to really overvalued to massively overvalued over a span of several months or even years. If you walk away from the rally too soon, you risk leaving huge gains on the table.

Meanwhile, historical data can be useful in contextualizing a market move. But you know the saying “Past performance is no guarantee of future results.” Just because this is the second-longest advance in modern history, that doesn’t mean it can’t go on to be the longest — as long as the fundamentals remain intact and continue to support the move.

I’ve been saying for a year and a half that you had to embrace this run, rather than fear it. I’ve been urging you to get out of over-rated, under-yielding bonds, and buy higher-yielding, higher-potential stocks. And I’ve been saying that the “Trump Quake” that began with his election in late 2016 was a game-changer, one that would lead to potentially huge gains in several key sectors.

All of those forecasts have come to pass, so I trust you’re happy with the results in your portfolio. But it’s only natural to wonder if all that is in the past, and whether the epic run is over.

I’m laying out my full stance — in incredible detail and with fresh investment recommendations — in the January gala issue of my High Yield Investing service.

But I don’t mind sharing the “short version” here: No, it’s not yet time to abandon this rally! Don’t pick up those spears and try to stab the bulls yet – because they’ll just run you over.

Instead, stay focused on buying and holding the highest-rated, most-promising ETFs and stocks in our Weiss Ratings coverage universe. Those are precisely the kinds of picks I’ve been sharing in High Yield Investing and I’m happy to report they’ve paid off handsomely for subscribers, with several double-digit winners in the last several months alone.

Until next time,

Mike

Mike Larson is a Senior Analyst for Weiss Ratings. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.