One approach is to look at sentiment. The best buying opportunities occur when investors are most gloomy. Unfortunately, sentiment is hard to measure decisively. At the end of January, bears outnumbered bulls by nearly 19 percentage points in a survey of the American Association of Individual Investors. That sounds pretty depressed. But Richard Bernstein of Merrill Lynch points out that Wall Street strategists are recommending a much higher weighting in equities than they did for much of the 1990s.
Then he says valuations are cheap...or not:
There are, broadly speaking, two schools of thought. The optimists argue that shares are not expensive relative to either trailing or prospective earnings and are very cheap relative to government bonds. The pessimists argue that corporate profits are historically inflated and could have a long way to fall as the economy subsides.
Finally, BWood says it is this uncertainty that explains why markets are so volatile. Duh.
This uncertainty helps explain why markets have been so volatile lately. It is tempting to believe the economic and credit problems are a short-term blip and that Wall Street will be rescued by the Fed as it has been so often before. But every time that view seems about to take hold, something happens to make investors fear a more sinister possibility: that years of debt-financed growth are finally unravelling and that the Anglo-Saxon economies face as bleak a decade as Japan did in the 1990s. The market may not hit bottom until that fear recedes.
There was a time when I couldn't wait to receive my latest copy of The Economist and the first thing I did when it arrived was read the Buttonwood column. Not anymore.