Last week, a few incidents in Europe and the concerns about earnings and valuations of the U.S. stock market spooked investors. The reaction was healthy for a market that has enjoyed the kind of success seen in stocks over the last few years, but so much of the doomsday story was a rehash of things that were supposed to happen a long time ago. Granted, if you think the Dow Jones Industrial Average is overvalued at 6,600, it stands to reason, one would feel that way at 17,000.
Nevertheless, as the market moves higher, the valuation proposition must improve as well; considering the massive increase in the market over the last few years, there is huge pressure on stocks to prove they deserve current valuations and augur for even higher valuations. However, let's keep in mind that whenever someone uses the March 2009 low as "fair value" for stocks, they simply are not being realistic. In fact, you are talking or listening to a die-in-the-wool bear or someone that allows politics and emotions to overrule common sense.
However, the same could be said at current levels for bulls, unless fundamentals continue to improve.
Of course, I am all about finding individual names with upside potential based on a variety of factors, so discussions about "the market" should be put in the proper light. When too many stocks are overvalued, along with pullbacks, even the great names will take hits, too. However, those same great names will be among the first to rebound. If you are a long-term investor, getting caught panicking during a short-term pullback is a dangerous position. There are Challenges:
Macro
- U.S. economy has to pick up speed looking for 2H14 GDP, above 4%
- Emerging markets shake-off growing pains
- Global hotspots come under control
Individual Holdings
- Take market share
- Expand margins
- Global growth
Listening to Carl Icahn has cost investors untold profits since the rally began. Yes, one day he will be "right," along with everyone else preaching caution or catastrophe, but considering his stature, it seems so reckless. Being right will not make up for lost time and lost profits, even if there were a worst-case scenario, it is unlikely investors haven't banked some post-crash profits.
-Carl Icahn's Greatest Hits
Carl Icahn says 'time to be cautious' on U.S. stocks
Reuters/July 10, 2014
"In my mind, it is time to be cautious about the U.S. stock markets...while we are having a great year, I am being selective about the companies I purchase."
Icahn warns stock market could face 'big drop'
Reuters/November 18, 2013
"I am very cautious on equities today. This market could easily have a big drop," Icahn said. "Very simplistically put, a lot of the earnings are a mirage, they are not coming because the companies are well run but because of low interest rates."
Icahn warns another downturn may lie ahead
Financial Times/March 11, 2011
Carl Icahn has joined the growing chorus of prominent investors warning that another downturn may lie ahead. “You’ve got to be myopic if you’re not at least concerned that there might be a major correction,” the veteran corporate raider told the Financial Times.
Icahn Says 2nd Downturn Could Cause ‘Bloodbath’
Dealbook/October 9, 2009
Carl C. Icahn, the billionaire investor, warned Friday of the potential for a second economic downturn that could cause serious pain for investors. "If you get a double-dip recession and they start coming down, it's going to be a bit of a bloodbath," Despite the months-long stock market rally, Mr. Icahn took a generally cautious tone in Friday's interview. He did say he sees an investing opportunity in real estate - an opportunity to sell it short, that is.
Bottom Line
Everyone has an opinion. However, what drives those opinions change from history, knowledge, intentions, and desires. Motivations are critical as well. Investors should always be cautious and vigilant; trying to invest based on a crash is impossible. We can adjust risk, but you cannot be completely in and out at the same time.
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