Acrophobia

     Acrophobia is a big word meaning "fear of heights".  I am beginning to suffer from this disease. It usually affects me when I research stocks that I might be interested in adding to my portfolio. The PE ratios of many stocks are at unsustainable levels currently. What is driving this unusual level of interest in common stocks? Several factors have contributed to these high valuations. First, extremely low interest rates for fixed income investments like bonds and CD's have steered investors to the equity (stock) market for dividend yield and capital appreciation. The second factor is simply supply and demand. There are too many dollars chasing too few stocks, creating an imbalance and causing stock prices to rise.When interest rates start to normalize (return to historic levels) , stock valuations should moderate. Currently, the Federal Open Market Committee (FOMC) is expected to raise rates again this June. Any weakness in the stock market or economy in general may delay this move. I recently looked at a chart of the Dow Industrial Average from 1980 to present. The upward slope is staggering. The only real deviation occurred in 2008-2009 during a severe recession. Interest rates were slashed during the recession to stimulate the economy which was on the brink of collapse In addition to already low interest rates, the FOMC began a program of Quantitative Easing. This flooded the capital markets with liquidity so loans could continue to be made and businesses would stay open. Now the Feds would like to unwind all this stimulus and return to normal. My fear is that stock valuations have been propped-up by all this artificial stimulus and may react badly to any attempt to normalize interest rates. Hopefully the transition will be gradual enough to avoid any severe repricing of stocks in general.. Therapy for my Acrophobia includes raising cash by selling some positions that appear to be richly valued and making a list of potential buys in case the market corrects in a meaningful way. I also am watching local CD rates and buying into a laddered CD strategy which is what a retired guy my age should do. I still hold plenty of stocks and a few bonds,  which I will hold to maturity, but my cash and fixed assets will help insulate me in a market downturn.