Dow over 20,000 and overpriced

The last two weeks we experienced the Dow Jones Industrial Average (DJIA) topping 20,000 for the first time in history.  This milestone was inevitable, but at the current time and price multiple it is too high.  This week’s post will look at it from a different perspective, what are people saying about this historic rise in DJIA prices?

Say what you will about the ultimate importance of the Dow reaching this big round number, but it certainly got there in a hurry. The 9% the Dow has added since Election Day is the sort of move that is usually reserved for market rebounds after big tumbles as opposed to when it was already in reach of its record high. – Justin Lahart, Dow 20000 Means Stocks are Pricey, WSJ.com

Even if I understood quantum mechanics, this (rally) wouldn’t make sense but oh well. Rally on!! – Heath Anderson WSJ.com forum

So what’s the alternative to stocks? Bonds, paying zilch if they’re solid and a few percent if they’re not (do you really want to lend to Chicago?) Real estate? REITs seem to be taking it on the chin with more mall defaults on the way according to an article today. Individual property? That’s more sunk illiquid capital for a long-term spec bet than most investors can stomach.

I guess there’s always unicorn farms.” – John Rogitz, WSJ.com forum

Yes. P:E’s are above the levels pre dot.bomb and pre derivative/housing crash. And the Dow is jiggered by removing losers and inserting winners. Celebrating a single index is like sacrificing goats to make it rain. – Marty Anderson, WSJ.com forum

It’s really disappointing how the markets can react to perceived opportunities/disappointments in the future without knowing any specifics. Premature ejaculations never really result in material benefits. Can’t we wait until specifics are delivered? Does business award bonuses for ideas that never see the light of day? – Bob Schafer, WSJ.com forum commenting on the fast run up of financial stocks since the election (up between 15-36% in the last few months).

The Trump trade seems to be an excuse to overprice the companies in the stock market.  When the DJIA passed 10,000 for the first time, the phrase irrational exuberance was used to describe the market.  The metric then passed the 10,000 mark over 30 times before crossing 20,000.  The Trump trade is all focused on what he is planning to do, and very little on what he will actually do.  The market seems to think that his policies will be very one-sided and only include upside opportunities.  For over three months, the market appears to only be considering the upside potential.  Several articles this week indicated that Wall Street is taking its cues from Washington.  Until earnings and more importantly cash flows begin to catch up, I think that the markets will be more volatile.  Therefore, I am currently maintaining 50% of my investment accounts in cash and cash equivalents.  Consider Warren Buffett:

Be fearful when others are greedy and greedy when others are fearful