Market Myth #1: The\nStock Market and the Economy are Too Disconnected<\/strong><\/p>\n\n\n\n The key element to understand here is that the stock market\nis a leading indicator for the economy. Case-in-point: historically, markets\nreach a bottom about four months beforea recession officially ends. <\/strong>As\nI\u2019ve written before, stocks do not tend to wait for good news.<\/p>\n\n\n\n As such, the stock market being disconnected from the\neconomy is not necessarily an anomaly \u2013 it\u2019s the norm. In past economic cycles,\nwe have seen an economy beset by job losses, rising uncertainty, and\nrelentlessly negative news coverage, all while the stock market rallies. After\nthe 2008 Financial Crisis, it was not until late fall 2009 when improvements in\nthe labor market became visible. By then, the bull market was already six\nmonths old. <\/p>\n\n\n\n In my view, the stock market today is arguably pricing-in\nwhat the economy will look like a year from now, and what the market sees is\nsignificant pent-up demand, a fading pandemic-induced economic impact, and a\nwall of liquidity coursing its way through capital markets (with maybe more on\nthe way).<\/p>\n\n\n\n _________________________________________________________________________<\/p>\n\n\n\n Instead of Focusing on Market Myths, Focus on the Fundamentals!<\/a><\/strong> If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!\u00a0 _________________________________________________________________________<\/p>\n\n\n\n Market Myth #2: This\nElection Will Make or Break the Economy and Stock Market<\/strong><\/p>\n\n\n\n There is little doubt that this U.S. election cycle is about\nas contentious as it gets. Depending on your political orientation, you may\nthink a victory for the other side will have damaging consequences for the\neconomy and the market. Fortunately, history does not provide the same\nconclusion:<\/p>\n\n\n\n S&P 500 Average Annual Performance, 1933 – 2019<\/strong><\/p>\n\n\n\n At Zacks Investment Management, we maintain a politically\nagnostic approach to investing. This approach is not to say that politics or\npolicies do not matter \u2013 they do. But in our view, it makes better sense to\nform an investment thesis once policies are known and appear poised to be\nenacted into law. In other words, it\u2019s better for investors to watch what\npoliticians do, not what they say.<\/p>\n\n\n\n Market Myth #3: Valuations\nare Too High<\/strong><\/p>\n\n\n\n With corporate earnings still inching back to pre-pandemic\nlevels \u2013 but with the stock market also near all-time highs \u2013 valuations have\npushed higher. In previous investment cycles, investors would have looked\nwarily at an S&P 500 trading at over 20x forward earnings. Today, not so\nmuch. Why?<\/p>\n\n\n\n In my view, the best answer is: interest rates. Near-zero\ninterest rates have implications for nearly all asset classes, not just bonds.\nIf an investor can expect to earn only 1% on a 10-year U.S. Treasury, the\ndesire for a better return is likely to nudge them further out on the risk\ncurve \u2013 often into stocks.<\/p>\n\n\n\n Think of this another way \u2013 if the risk-free rate is 1%,\ninvestors may reasonably demand a return of 4% from stocks, factoring-in a 3%\n\u201cequity risk premium.\u201d An earnings yield of 4% on stocks implies a P\/E ratio of\n25, signaling investors may even by comfortable with valuations drifting higher\nfrom here. <\/p>\n\n\n\n Market Myth #4: The Technology\nSector is in a Bubble Like 1999<\/strong><\/p>\n\n\n\n Technology in particular has seen valuations drift\nmaterially higher, spurring concern that a bubble is forming akin to the one in\n1999. There are several key differences between now and 1999, however:<\/p>\n\n\n\n To be fair, many technology stocks are quite expensive and\ntrade at exorbitant prices relative to earnings and free cash flow. But not all\nof them do, and investors should take care and perform due diligence when\nestablishing your portfolio exposure to the sector. <\/p>\n\n\n\n Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n As we approach the election and the end of the year,\ninvestors may be lured increasingly into lines of reasoning that are based less\non fact and more on emotion. Some of these lines of reasoning may be market\nmyths, and investors should try to avoid the \u2018traps.\u2019 When the investment\nand\/or political and social environment feel uncertain, it is important to\nredouble your efforts to make investment decisions based on fundamentals and\nwhat we know about equity markets from history. Doing so usually results in\ntaking a steady, patient, long-term-oriented approach, which is where a\nmajority of investors need to land. <\/p>\n\n\n\n
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With the end of the year fast-approaching and the election just around the corner, you may be tempted to base your investments less on fact and data and more on emotion. Instead of giving into this way of thinking, I recommend staying focused on the fundamentals. To help you do this, I am offering all readers our just-released Stock Market Outlook report. This report contains some of our key forecasts to consider such as:<\/p>\n\n\n\n
<\/a>IT’S FREE. Download the Just-Released November 2020 Stock Market Outlook<\/a>3<\/a><\/sup><\/strong><\/p>\n\n\n\n![\"\"](\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/motm_table1_10032020-1.png\")
Source: Strategas Research.2<\/sup> To note: the above returns exclude 2001-2002, as power in the Senate changed hands three times in that period.<\/em> <\/figcaption><\/figure>\n\n\n\n![\"\"](\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/motm_table2_10032020-1.png\")