Because stocks have had solid double-digit gains over the last 12 months, we hear many people predicting that they are ready for a fall. In addition, the "Sell in May and Go Away" crowd is giving us all the statistics of how stocks have fared between May and November historically. The reasons given for a stock sell off are full of language about momentum, price gains, and too much-too soon. We want to add very quickly that few of the "stocks are too high" crowd today were among the "stocks are too low" crowd at the market bottom in March of 2009. Indeed, if you go back to their blogs and read what they were saying around the bottom of the market, you will find many of them were saying "stocks are too high," even then.
Ah, but we beg to differ! In the long-run, valuation will rule just like it always has.The reason is over the last 80 years, S&P stock prices are highly correlated to both After Tax Profits and Dividends. The computers and traders will wage their daily battles of betting on zig or zag, but in the long-run, zigs and zags will ultimately be seen as vanity, a chasing after the wind. From a valuation perspective, stocks are still cheap and could only become expensive if the economy were to fall off a cliff and drag earnings and dividends with it.
Source: Rising Dividend Investing
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