Would anybody in their right minds accept a two to three per cent annual return on an investment selling at an all-time high with a potential to lose half its value and perhaps as much as 10-15 per cent in a single day?
Step forward anybody with their money in US stocks today. The risk-to-reward ratio is so heavily skewed against you that staying invested is far more risky than moving to the sidelines and parking your wealth in a bank.
What is the upside? Seven to 13 per cent by the end of the year if you take the advice of perma bull Jeremy Siegel. However, any technical chartist will point out that the downside risk is up to 50 per cent. All it would take is a shift in confidence that lowered the market’s price-to-earnings ratio to a level consistent with an economic recession and not a recovery.
How much poor economic data does it take to do that? How long will investors believe the sham data from China that is completely divergent from that of its trading partners? Is the US economy really improving except for owners of inflated stocks and real estate? Has the eurozone not just downgraded its economic outlook yet again?
Most stock traders accept all this but put their trust in the Federal Reserve to pump more and more money into the economy. That will work until it doesn’t. Do people not remember how house prices were supposed to never fall because the Fed was going to always lower interest rates to keep them up?
We are in the wrong place on the risk-reward curve in the US stock market and the end is nigh!