Stock Market Good Investment Right Now In 2015 – This One Indicator Has Predicted Every Major Stock Market Correction for Last 60 Years
Tue, Apr 8, 2014
Investing In The Stock Market A Good Idea
One thing has happened at the top of every market over the past 60 years.
And it’s happening again right now.
The chart below of corporate profit margins over the years shows exactly what is going on right now:
As you can see, there are plenty of ups and downs for corporate profit margins over the decades.
If you pay close attention though, you’ll notice that when profit margins peak and start to decline, stock prices quickly follow.
It’s part of the bubble and bust cycle that plays out over and over again.
Profit margins peak. Expenses quickly follow. Lavish bonuses are paid. Expansion efforts and investments increase. The good times don’t last. Profit margins being to drop. Managers fear the worst and slash expenses. Everything bottoms out and the cycle begins anew.
Stocks are the same way and that’s why their prices tend to follow closely behind profit margins. Earnings increase and margins expand. Investors see more and better good times ahead. They bid up share prices. The first few signs of weakness are noticed. Earnings and margins begin to fall. Investors begin to fear the worst. They sell. And stock prices decline. Then it all bottoms out and the cycle repeats.
Whether it’s the entire market, a specific sector, or an individual stocks, we see this cycle playing out all the time.
Right now, with the Dow above 16,000 and profit margins for the world’s largest companies at historically unprecedented levels, we see the potential for a significant drop in profit margins and earnings getting ever closer.
This table from A Wealth of Common Sense shows why:
The table breaks down the rate of earnings growth by decade going back to the 1930s.
It’s clear what we’re seeing now, with earnings growing at a 16.6% annual rate, is unprecedented.
It’s great news for right now and has played a major role in driving stock prices to all-time highs.
However, it’s important to note, the rate of increase will not last. It can’t last. And once earnings growth returns to historic rates, it’s likely stocks will give up a good portion of their gains.
Remember, stock prices are based on future expectations. With this kind of earnings growth, expectations are very high.
Once those expectations change, stock prices will quickly follow.
The risks are high right now in stocks. There’s no guarantee of a major correction of crash imminent. But it’s time to be a cautious.
Stocks can and will go far higher than most everyone ever expects during booms. They also tend to fall far lower during bad times.
Right now is one of the good times. It will not last forever. By watching profit margins and earnings growth rates, we’ll likely get a very good idea of when those good times will come to an end.
The Group of Big Investors in United States.
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