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NEW YORK ( ETF Expert) -- In a recent column about central banks rescuing struggling economies, Joe Calhoun at
Real Clear Markets
discussed the crippling effects of ceaseless monetary stimulus. Indeed, the activity is frequently correlated with sub-par economic growth and an erosion of purchasing power (a la inflation).
However, Calhoun takes his condemnation of interventions by central banks (U.S. Federal Reserve, People's Bank of China, European Central Bank, etc.) one step further. He laments the circumstances as being horrific for the long-term valuation of corporate stock assets because "weak growth limits the top line and inflation ultimately erodes the bottom line."
Here's where I depart from Calhoun's simplistic assessment. First of all, stock valuations don't mean a hill of pinto beans when irrational exuberance (e.g., 1996-2000) or walking-dead pessimism (e.g., 2009-2012) are in play. In both instances, analysts justified overvaluation and undervaluation arguments based upon different P/E varietals; in both instances, regardless of P/E assessments, stocks appreciated dramatically.
Should investors not have sought to profit from the late 1990s "New Economy" hype because it was irrational... or should they have rode the wave with a sensible and
highly liquid exit strategy
Unequivocally, it is the latter. Should investors have walked away from central bank reflation of stock assets that has seen the
Dow Jones Industrial Average double in value since 2009... or should they have participated in stock price gains with an exit approach? Investors have to be able to take advantage of stock uptrends if they wish to achieve their financial goals... period.
Secondly, P/Es are often meaningless when major benchmarks fall below and stay below significant moving averages like the 200-day. You can try to catch a falling knife and talk yourself into a deep discount value methodology, yet history has been kindest to those who managed risk by taking profits or small losses.
Anyone who understands bear market math recognizes the immensely
positive outcome of a small loss
relative to a big one. For that matter, anyone who has ever needed to use a catastrophic insurance policy (e.g., health, auto, homeowner, property, professional liability, etc.) recognizes that a small premium can often be the best money one ever spends.