Welcome to the end of the week and another edition of Happy Hour! Just sit back, relax, and enjoy your end of the week roundup of all things interesting in the land of money.
The markets roll in cycles. You pay attention long enough to market news, you can see this clearly. Though the market news has its own built-in cycle too. Much of it is filler, like the Sell in May headlines that already started popping up. That’s the hypothetical question that pits May sellers up against non sellers. My view – should a month decide your investment’s fate?
Anyways, the news follows several cycles around the markets:
- Monthly economic data cycle
- Quarterly earnings cycle
- Election cycle
- Business cycle
- Economic cycle
The first three are informative data cycles that drive the latter two. Elections bring out short-term uncertainty but also clarify how much political influence will affect things for a few years.
It also leads to the boom and bust cycle, the value/growth cycle, and others I can’t think of off the top of my head. These are influenced by money flows due to short-term information cycles above. Every news bit (monthly and quarterly cycles) creates a tiny ripple that builds into a bigger wave of business and economic cycles.
But how much of it should we pay attention to? Trying to decipher the market’s reaction to the tiny ripples of information will drive you insane. But those bigger waves can be quantified.
The rise of index funds, specifically ETFs, make this easier to measure and take advantage of. You can see if an index is over or under priced compared to its average. Check the PE ratio of funds you own and compare it to its average PE over time – this resource will help.
You have two choices at that point. Put money into overpriced indexes, those with an above average PE. Or you can put more of it to work in the underpriced indexes, those with a below average PE. The long-term payoff is in the latter.