Stock Market Cycles

By PAUL B. BROWN
Published: August 4, 2007

SALES of high-end art, jewelry and wine are booming. Stocks, until recently, were hitting new highs, and consumer confidence and spending are solid.

That could only mean one thing: the stock market bubble is about to burst.

That is at least one plausible conclusion, James B. Stewart writes in Smart Money.

“Far be it from me to dampen the party, but why do I feel as though I’ve lived through this before? Maybe it’s because I have — in the late 1980s and then again the late 1990s. Indeed, 2007 feels much the same as 1987 and 1999 did.”

Mr. Stewart is not saying that a 1987-style stock market crash is on the immediate horizon, and he concedes that “by many measures, stocks aren’t overpriced, even at recent highs.” For example, when the Standard & Poor’s 500-stock index reached its previous high in 2000, shares were trading at nearly 26 times earnings. When it reached a new high in June, shares were trading at less than 16 times earnings.

“And yet I have learned over the years that nothing rises forever, and that the longer this goes on, the more severe will be any correction.”

GIMME SHELTER If you think a stock market correction is imminent, and given yesterday’s sell-off, it seems possible, what is the best course of action?

Karen Hube in Best Life offers six suggestions:

¶Raise cash. With some money market funds and one-year C.D.’s paying 5 percent, this is an attractive option. (Mr. Stewart makes the same suggestion.)

¶Increase your international holdings. “Foreign stocks are insulated from the U.S. market — if U.S. stocks tumble, foreign shares generally decline, too,” Ms. Hube writes. But international stocks are cheaper than stocks traded in the United States, meaning that there is probably more growth opportunities and “the falling dollar creates a kind of cushion for U.S. investors in foreign markets.”

¶Move to blue chips. Well-known stocks like I.B.M., Exxon and Altria are likely to weather the storm better than small companies, Ms. Hube thinks. And the dividends they pay will help mitigate losses.

¶Consider T.I.P.S. Treasury inflation-protected securities offer a guaranteed return above inflation.

¶Real estate. Really. With commercial real estate still going strong, investing in real estate investment trusts is still a good choice, Ms. Hube concludes.

¶Hedge. Invest some of your money in a mutual fund that goes both long — bets that the stock market will rise — and short — benefits when stocks fall.

CULTURAL BONDS Increasingly nonprofit cultural institutions are issuing bonds as a way to raise revenue, Entrepreneur writes.

The good news for investors is that the bonds are tax-exempt and, as Farnoosh Torabi notes, they bring diversity to your portfolio.

The bad news is that they tend to be riskier than municipal bonds. When a city or state gets into financial trouble, they can always raise taxes. If a museum or other nonprofit runs into difficulty, doubling the admission or ticket price is usually not the answer.

TWICE AS NICE “The two-dollar bill is on a roll,” Readers Digest reports, adding that no one is quite certain what is behind the sudden popularity of the note that is “historically given as change at racetracks, strip clubs and — because it bears his face — Thomas Jefferson’s Monticello estate.”

The Treasury Department produced 122 million of the notes in 2004. Last year it made 230 million.

Maybe it is a leading inflation indicator.

FINAL TAKE If you want to make 18 percent a year on your money, here’s a sure thing, courtesy of Kiplinger’s: Pay off a credit card that has a high interest rate.

“Six in 10 of us are guilty of carrying a balance — many at a rate of 18 percent or higher,” Jessica L. Anderson writes, noting that if you paid $1,000 toward your outstanding balance, you would save $180 in annual interest.