It's time to take profits, trim the sails, play with house money or prune your portfolio. Financial markets - the stock market and bitcoin - have had a spectacular run of late. The S & P 500 is up more than 27% in 2024, while the Nasdaq Composite has soared 31%. Bitcoin also topped the $100,000 milestone for the first time last week, and it has more than doubled this year.
By many measures, stocks are richly valued. However, that presumed overvaluation is being offset, at least partially, by the recent decline in interest rates. Still, the forward price-earnings ratio on the S & P 500 is about 23-times 2025 profits, while the trailing PE ratio is 28. Both are on the very high end of historic ranges.
"Valuations are imprecise when used as market-timing tools," said an expert.
Stock market capitalization as a percent of gross domestic product is at a historic high. Equity valuations are topping the highs seen in all prior bull market cycles. Similarly, U.S. stock market capitalization accounts for roughly 60% of the value of the world's equity market values.
Investors growing complacent
The U.S. is home to trillion-dollar companies and domestic markets have easily outperformed global markets for the last two years. This outperformance is reflected in renewed complacency among investors who believe good times will carry on well into 2025.
"The CBOE Volatility Index slipped below 13 on Friday," indicating very little fear among investors.
This can be a contrarian indicator that shows up just as a meaningful correction is upon us.
Managing risk in exuberant times
"I remain convinced that cryptocurrencies -- and bitcoin more specifically -- is the single largest market mania in history," remarked Ron Insana.
In past historic cycles, reaching for sky-high valuations has served as an ultimate sign of a market top. It's never wise for long-term investors to simply sell everything and go to cash; however rebalancing one's portfolio so it's not grossly overweight on big winners is prudent.
"I would caution against complacency and recommend vigilance."
The new year will bring immense uncertainty regarding fiscal and monetary policies along with trade and immigration concerns which could lead to less-than-ideal outcomes economically and financially across various sectors including Wall Street.