Scan the headlines at any point over the past six months, and you’re likely to have come across this one:
Same headline for 6 months now pic.twitter.com/58dMzMFP9d
— Hipster (@Hipster_Trader) January 21, 2021
The stock market is a great information discounting machine, looking ahead months or even years and translating expectations of future growth into prices today. Somewhere out there is an army of talented analysts with spreadsheets forecasting earnings growth decades into the future, and correctly pricing those earnings at a precisely-calculated discount rate. Stock prices today reflect all known information and are the best estimate of true value.
OK, I hope you know I’m being sarcastic. That’s not even close to true, nor has it ever been true.
An army of analysts with spreadsheets is plugging away on earnings estimates, but only a delusional madman would believe that they can predict a company’s earnings a year from now let alone a decade from now. And the discount rate used to price these dodgy earnings estimates are so sensitive to small changes they are useless.
If you want a more accurate headline for what’s been driving the market of late, here you go:
— StockCats (@StockCats) January 21, 2021
Now, understand I’m not complaining. I’m not here to say what the Federal Reserve should or shouldn’t do. Fed Chair Jerome Powell saw the financial system melting down last March, and he didn’t want to repeat the 2008 global financial crisis. I get it, and I would have probably done the same thing in his position.
I’m more interested in what the Fed’s moves mean for our investment portfolios. So long as the Fed is firehosing liquidity into the capital markets, stocks should rise overall. It won’t be a straight line, and there will be blips along the way. But until the Fed tightens, I don’t see this bull market ending.
That’s a good macro backdrop to have in place. But how do you choose stocks at a time when valuation models are skewed and virtually everything looks expensive?
Why Having a System Matters When Investing
You need a system. And that’s exactly why we use Adam’s Green Zone Ratings system here at Money & Markets. Adam’s metric assigns a numerical ranking for every stock in our universe based on six major criteria: momentum, growth, value, size, quality and volatility.
In this system, absolute values don’t matter. There is no “correct” price-to-earnings ratio for a stock. It’s a relative value system. Every stock in our universe is compared to every other stock in our universe, and they are ranked based on an objective score.
So, even if the entire market looks overpriced at the moment, our rating system helps us discover the cheapest, fastest-growing, highest-quality, lowest-volatility stocks showing the highest momentum … and at the market-cap size we want.
If you want to see how a stock you’re following rates based on our system, simply go to www.moneyandmarkets.com and type the ticker symbol into the box in the upper right corner. You can also read our more extensive guide here.
And if you want a deeper analysis, you can learn more about Adam’s methods and his Millionaire Master Class here.
I don’t know what the coming years will bring. But I know a system helps me make sense of it all, and Green Zone fits the bill nicely.
To safe profits,
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.