Party Like It's 1999!
Watching the stock market today feels like showing up late to a wild party. Clearly everyone is having way, way too much fun.
YTD Major Index Returns
Indeed, the improving US economy and fresh tax bill has caused stock prices to "melt up", yielding strikingly high valuations. For example, the Shiller Price to Earnings ratio on the S&P 500 has moved up to 32 - double it's median level of 16. So it's definitely a party, tempting to rival 99.
S&P 500 Shiller P/E RATIO
Today's rich valuations are due to several factors. First, economic conditions are improving on many fundamental levels. Earnings on the S&P 500 started the year at $97, and are now over $104 per share. In September consumer spending popped 1%, which was biggest move we've seen since 2009. Further, the ISM Manufacturing Index is now over 58, and median wage growth has risen 3.6%. In other words, the numbers look good. Until they slow down, investors will not.
Second, bull markets are simply contagious. Many investors, whether professional or not, simply cannot emotionally handle modest returns when they see the markets soar. Today, we can safely assume these investors are out there acting on emotion, shoving more of their portfolio into stocks than what is reasonable. This type of behavior is what helps perpetuate a bull cycle.
The Emotional Cycle of Investing
Right now, our best guess it we're not in any sort of "bubble". (At least not yet.) However common sense tells us that this party must end at some point. Unfortunately, nobody truly knows when exactly this will happen. It could be tomorrow”, or in several years. So if you're a long term investor, we think it is wise to stay disciplined and not let your emotions turn you into a speculator. Additionally, here are a few other tips to consider:
- Review your investment strategy. Make sure you understand what you own and why you own it. Diversify, and have a plan as to what to do when the markets move.
- Re-balance your portfolio. Keep your portfolio in line with your needs and risk tolerance. We find most investors do not own enough international equities.
- Consider Hedging. Non correlated assets and futures can help protect your portfolio.
- Revisit your financial plan. Run asset and income projections. Use Monte Carlo tests and simulate your retirement plan under different market conditions.
As always, reach out if we can help. Best!
- JML
DISCLAIMER - J. Loyd Capital Management, LLC is a registered investment adviser offering advisory services in the State of Illinois and Missouri and in other jurisdictions where exempted. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by our firm in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.
CONTENT - All written content on this site is for information purposes only. Opinions expressed herein are solely those of J. Loyd Capital Management, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Past performance is no guarantee of future results.
LINKS - This website may provide links to others for the convenience of our users. Our firm has no control over the accuracy or content of these other websites.