During the Covid crisis we spent many days having webinars to try to calm people’s nerves about what we saw as the outcome of all recessions and market dislocations. Our advice was to stay the course and continue to add to your retirement funds. As we approach the middle of June the market has almost fully recovered the enormous losses incurred at the beginning of the year. While we made the point that the market is a future predictor and will be recovering ahead of the economy, it is important to recognize that the economy has not recovered yet. This is a good time to reflect on how you felt during this period and if you were comfortable with your portfolio during the crisis. If you were uncomfortable with your portfolio during the crisis then it may be a good time to retake the questionnaire and make sure your portfolio represents your investment comfort. We encourage to login and retake the questionnaire with your company’s credentials here. Please feel free to call us for help.
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Category Archives: S&P
What should an investor do now?
On Dec 26th for 2019, our blog stated:
It’s not the price of the market, it’s the valuation of the market. The markets are the greatest predictors of future economic growth. Sometimes the markets get too enthusiastic. Granite Group believes that the 2020 returns will not be as robust. If you are retiring or in need of funds, please make sure your allocation reflects your risk and needs.
That is what was said then, and today we want to give some insight on one way to value the market, and what you can do if you have short term needs or long-term goals:
One way to value the market:
The Price to Earnings Ratio (P/E) is the price the index divided by the earnings. If the price of the S&P index is 10 and the earnings is 1, the P/E is 10. The average over the last ten years is 16.4 times earnings. Before covid and oil issues, the P/E ratio was at a premium of 19.5 times earnings for 2020. The P/E ratio (as of today) stands at over 22 times 2020 earnings. That means, the markets are more expensive today than they were before covid.
What should an investor do?
For investors with short term needs, college tuition, retirement or other more secure needs: since the market has moved up from the bottom, this could be a good time to secure your short-term needs. Please be sure your allocation meets your needs. This is true for any market condition.
For investors with a longer time horizon than 12 months, look at 2021 earnings. As of today’s writing, the markets are trading at almost 18x 2021 earnings. That is not expensive or cheap given the amount of stimulus. It will be a slow recovery, but a recovery none the less. On dips, we would increase yearly contributions.
If you are one of our 401k clients, please log on to the educational site to reassess your risk. Use your company password. After you receive the results, be sure to speak with your advisor or click on the “about us” and email Sharlene Kelly for further assistance.
Will we peak again?
On Aug 2, 2013 the S&P 500 Index closed at 1709.67, an all-time high. On August 27th, the market had fallen roughly 5%, based on the possibility of war with Syria. Those actions are seemingly less likely, as the markets have come back to within 1.2% of the peak.
The question for the rest of the year is: “Will we forge ahead, tread water, or come down further?” If we look at the leading economic indicators, the answer would be a resounding ”We are going to move ahead of the peak reached earlier this summer”.
The last batch of ISM indicators show an expansion of growth, which should bode well for the markets. However, there are many bumps ahead from Fed decisions, which could create an uncertainty for investors. We are roughly 20 days from the government running out of money with no resolution. We have a debt ceiling that has reached the limit, with each side digging in their heels for a fight. Most of these Federal negotiations will end with compromise, or create a kick the can down the road mentality. This uncertainty will undoubtedly cause some volatility. If we go back to simple fundamentals, we are not trading at a premium to historical P/E, but we are also not that cheap either. Earnings this upcoming quarter will be more important than normal. We still are “muddling “ along.
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