So the International Monetary Fund (IMF) slices its forecast for the world's economies and we freak out about it? Apparently we are supposed to agree with, "Downside risk related to an equity price correction in 2014 have also risen, consistent with the notion that some valuations could be frothy."
Here's the big issue: Valuations are always frothy. Always. Our stocks have been overvalued for ages and ages. But if you keep cash on hand, if you raise cash, if you are short stocks, you are now well behind the market. You are not even going to catch up unless the market's froth actually turns into something that can make a material difference to stock prices.
Oh, and where is the froth? In stocks that sell at 17x earnings when interest rates on U.S. Treasury bonds are low and going lower? This statement reminds me of the one that Federal Reserve Chair Janet Yellen made right before the beginning of the big biotech buyouts -- when the large pharmaceutical companies, starved for growth, went after the smaller ones, precisely the ones with the stretched valuations that Yellen was talking about.
Or maybe the IMF doesn't like the new GoPro (GPRO) Hero 4 product, or hasn't tried it, or hasn't looked at all the cool videos on YouTube of goats and boars riding surfboards.
The simple truth is that, at moments like these, we ring the register -- we go home. But the index funds stay in, "against their betters," and ride it out, because all other assets are frothy or frothier, and those who have gone home will start out next year even more in the hole.
It shouldn't be this way. Those who are in index funds should sell their index funds if they believe this. But that money, once committed, doesn't leave, while the "smart" money -- which leaves the table because of the IMF or shorts because of it -- tends, after a few days' time, to regret the decision. Then these folks come back at levels that don't make sense, especially after taxes, to anyone -- but especially to their investors, who didn't give a hoot about the IMF anyway.
