To Buy Or Not to Buy

The stock market is certainly due for a pullback, and it will most likely happen in the next two or three weeks due to Congressional budget battles.  Are we near a bear market, though?  The answer is "no" for a 30-50% drop for several reasons.  First, the economy is doing okay in spite of the fact that some people don't like it. The Philly Fed economic report for this month was astoundingly positive.  It was +22.3, up from +9.3 in August. Unless we are about to enter a recession or large war, there is no reason to worry about a bear market.

Secondly, we can look at the S&P 500 price and earnings.  Currently, the S&P price is 1709 with the latest earnings listed as $88 and change.  This gives us a P/E ratio of 19 which is higher than normal, and it points to a small pullback at some point in time.  However, if we do the earnings yield ratio E/P, we arrive at a stock yield of 5%.  This means the stock market will be growing slower, but stocks will still pay us more than the 3% interest from ten-year bonds.  So, the bottom line is that we need to keep buying stocks until bonds have a much higher yield.