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Why Selling (Tech) Stocks Now Based On Valuation Is Foolish

More and more bears are now coming out of the woods worried about the stock market valuation claiming that “it is expensive”.

Also dividend growth investors who are accumulating stocks in their portfolios for the next 20 or 30 years are joining the ranks of the perma-bears and selling. The latest Wall Street concerns are that the tech stocks which are up +19% year-to-date and thus ready to crash. I have seen bears saying lately: “I’ve seen all this before, I am not buying this expensive market because it is similar to dot.com bubble, 1932 crash, 1987 crash…” or you name it.

Although at 22 time trailing twelve month earnings the market may seem expensive, selling your stocks on some magic valuation level and fear will actually make you wrong. And you will be wrong until the acceleration of the economy and recent growth slows down.

And it may take for some time. We still may see more growth (and we will) coming pushing this market higher. Remember, there is still more than 70 billion dollars sitting on side and those investors anticipating the crash will capitulate soon and push this market higher in panic buying.

And we can see this trend already happening.

 

 · Luxury Spending

 

Luxury spending is back! Rich people are spending again for some time already (since April in fact). With the US economy heating up and the stock market reaching new highs consumer spending on discretionary goods is picking up again. This can drive the economy and market even higher than you may expect.

A Personal Expenditure Index (measuring everything from spending on pleasure goods such as luxury boats, aircraft, jewelry or watches is up +8.2% year-over-year. Luxury homes sales are up 29% for the same period of time.

As a mechanical engineer by profession I worked for this type of consumers and they are one of the significant economy drivers. Ignoring their behavior and selling your stocks based on fear will cause you missing the boat and losing a lot of great opportunities.

 

 · Dot Com Bubble

 

What happened during the dot.com bubble and why is it wrong comparing today’s tech sector with dot com is wrong?

In 1996 many investors too called for a large correction. They also considered the market expensive at 20 times earnings (similar to what we are seeing today), but the market continued going higher. For the next 3 years we saw the market climbing higher until the trailing PE reached 30. But it was not the valuation which caused the bubble to finally burst. It was a slowdown in the US economy in 2000 which exposed the phony stocks and they crashed along with the entire market.

In 2000 it was economic slowdown, but today, we actually see the US economy accelerating! If you want to be worried of valuation of the stock market, you must be also worried and see the US economy slowing down too. And there is a great chance that this acceleration trend will continue through 2018 and beyond. With this outlook, the stocks may become even more expensive than today.

 

 · Earnings Season With The Highest Growth Rate Since 2011

 

You may have missed it and think that companies reported bad earnings overall. I had this feeling myself when watching just a handful of my stocks. A few such as STX missed and dropped so much that it obstructed a clear view that yes, there were exceptions but overall this earnings season was one of the best so far.

Out of 425 of S&P 500 companies have reported earnings growth of 10.1% and sales growth of 5.5%.

If this earnings growth result stays at this level, it will be the second highest earnings season since 2011 as in that year we saw 11.6% earnings growth.

But there is another quite positive view. It will be the first time since 2011 S&P 500 will see two consecutive quarters of double digit earnings growth (in 2011 third and fourth quarter brought in 16.7% and 11.6% growth).
 

earnings
 

I am bullish on this market and I have been for the last year. There is no change in the economic outlook and there fore no need to panic and sell my stocks because of valuation. I keep investing in dividend growth stocks using DRIP and keep investing. You should do the same. You are in the market for the long haul and not just through tomorrow.
 





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