Valuations continue to reach new highs, and the market looks very expensive—by some measures, the third highest of all time after 1929 and 1999. Meanwhile, the economy is showing signs of slowing. I have made my own views about what might come next pretty clear, but it’s worth taking the counterarguments—that current stock prices are reasonable, not a cause for concern—seriously as well. I say this all the more because analysts I respect are increasingly positing that it is different this time. So let’s see if we can make a case for that.

When looking at the stock market, one of the key things we should focus on are earnings, as they represent the bedrock of a stock’s value. The best way to value stocks—the dividend growth model—analyzes earnings, growth rates, and required returns to determine what a stock is worth fundamentally. Growth rates and required returns are subjective estimates, but earnings are facts. Everything starts from there.

Yesterday, we talked about the worries surrounding exchange-traded funds (ETFs)—chiefly, that they could trigger a flash crash. Ultimately, we concluded that ETFs are just an enabling technology, not the real problem. The real problem, at least potentially, is passive investing. Let’s take a closer look at what the passive investing trend could mean for the markets.

It’s never the bus you’re watching for that hits you, they say. Even if you are watching for different buses, sometimes it pays to look at just how close they are getting to you. In that spirit, and in response to some questions I have gotten recently, let’s look at two different buses that could run over the markets: exchange-traded funds (ETFs) and passive investing.

In yesterday’s post, I explained that the noise in returns—in other words, how much they bounce around—is what imposes much of the risk when investing over shorter periods. When you might lose 20 percent or more in a year, any plans that start soon thereafter can be derailed. Volatility (i.e., the noise) is a real drag in that sense.

One of the key points I made in yesterday’s post was about your time horizon, and how shorter time frames call for more caution than do longer ones. But this is actually a bigger point, which applies to multiple areas of investing and life. So, I thought I would make the discussion more general.

Brad here. Today’s post is from Peter Essele, one of Commonwealth’s senior portfolio managers on the Preferred Portfolio Services^® Select platform. Peter has written here before about a number of investment issues. I think you will find his take on where markets are right now—with special attention to the VIX, which has been in the news a lot of late—is both timely and potentially important. Over to you, Pete.

One of the many blessings of having a son is that my life is rarely calm. Drama is a regular guest at the McMillan household whenever anything, however minor, happens. I do not always greet Drama with what he would consider an appropriate response, though. In fact, he usually gets a look and then a question: “Is it bleeding?” If, rarely, the answer is yes, I then ask, “Is it bleeding a lot?” If not, we discuss how the adage “When in danger or in doubt, run in circles, scream and shout” is always the wrong response.

First, there was hype and then improving sentiment in the real economy, along with a nice initial rush in the stock market. More recently, we’ve seen doubts and weak numbers creep in for the economy and worries and a small pullback for the stock market. And, now, we’re getting to the moment of truth: We are actually going to see whether companies are making as much money as the market thinks.

Today, I’m at the Barron’s Top Independent Advisors Summit, where I will be moderating a discussion titled “Fear and Greed” with two impressive panelists, Brian Wesbury and David Iben. I am very interested to hear what they have to say, and as moderator, I’ll be doing much more listening than speaking (no doubt to the benefit of the audience).